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Anya Kamenetz Generation Debt

Anya Kamenetz, Generation Debt

Student Loan Repayment: A Vocabulary Lesson

by Anya Kamenetz

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Posted on Monday, September 8, 2008, 12:00AM

Studies show that only one in five student borrowers make all of their monthly payments on time in the first three years of repayment. Yes, that loan can sneak up on you after that six-month grace period. And almost everyone I've spoken with who has taken out a student loan fails to fully consider the bite they're going to take in the long run.

But forget any regrets you might have. You've taken out those loans, and the thing to do now is come up with a doable plan to close them out and get on with your life. Here are 10 terms you need to know to become a wizard-level repayment master.

Good Standing: This has nothing to do with posture. It means being up to date with repayment. The best way to do this is to set up an automatic direct debit on the due date each month, from your bank account to the student loan company or companies. Direct debiting might even net you an interest rate discount of a quarter point to a full percentage point.

Borrowers in good standing also keep in touch with their lenders, letting them know if they move or change contact information. You should put as much of your correspondence in writing as possible and save copies of it. If you're late with a payment, call up the lender and say, "It's important to me to remain in good standing. Can I send you a good-faith payment (of at least $50) now?" Then ask what repayment options you might have.

Deferment: This is a period in which you don't have to repay your loans. While enrolled in any school at least part time, you'll automatically get an in-school deferment, plus six months' grace period after you leave. Military service brings automatic deferment, too. Otherwise, if you're broke and need a break, you must apply in writing to your lender. You can get a deferment for up to three years at the lender's discretion if you can supply evidence of unemployment, low income, and/or financial responsibilities such as children. The good news is, if you get an official deferment on a subsidized (Stafford) loan, the government picks up the interest on the unpaid debt.

Forbearance: This is another, more expensive way to take a break from your loans. Again, if you're under financial distress, you can apply in writing to suspend payments, make reduced payments, or pay only the interest for up to 12 months straight and a total of three years. The bad news is that, in forbearance, you have to pay at least the interest or it is added to the debt, meaning you're paying interest on interest, which can add up fast. I've met many people in forbearance whose loan balances are growing year after year. Still, it's a better short-term solution than just skipping payments.

IBR:  Although it sounds a bit like a distasteful disease, IBR stands for income-based repayment. Like extended repayment (stretching out your payments from the standard 10 years to 25 or 30 years) or graduated repayment (payments go from lower now to higher every two years), this is a way to manage your loans long-term.

But IBR has some important differences. First, it is offered only for federal student loans (this started in July 2009). Private lenders have "income sensitive" plans, but they basically amount to longer repayment terms and more interest. Under IBR, you pay in proportion to your annual income and family size, to ensure that your loans aren't too arduous. For most eligible borrowers, IBR payments total 10 percent or less of your total income. Plus, the loan is forgiven after 25 years -- just about the only way you can ever walk away from a student loan balance. If you have dependents and are committed to a low-paying profession such as social work, IBR could be a godsend.

Consolidation: This means combining several student loans into one loan with a single monthly payment.

When you consolidate, you can choose to lower and stretch out the payments from the standard 10 years to up to 30 years, but this means paying more interest in the long run. Consolidation was a great deal a couple of years ago when interest rates were at an all-time low. Today these loans may be more difficult to get due to the student loan market tightening. The main benefit is simplifying your loan, as well as resetting the clocks on benefits such as deferment and forbearance.

Delinquent: This is not the term for kids who smoke outside the Kwik E Mart. This goes into motion when you miss a single monthly payment. You'll start to get phone calls and letters. Penalties and fees are added to your loan, and the late payment is eventually reported to credit bureaus, which affects your credit scores. To get out of delinquency, call up your lenders and catch up on your payments as soon as possible. They may be willing to accept a payment plan -- that is, reduced payments for some period of time.

Default:  This is not a tennis rule. After nine months of missed payments, your loan goes into default. When it officially hits default, the full balance of the loan becomes immediately due, so it explodes with massive penalties, fees, and capitalized interest, which have effectively no limits. A $30,000 loan can become a $90,000 loan after two years in default.

Default happens to only about 5 percent of loans in the first two years after repayment, mostly to students who drop out. But if it does happen, your options are limited. Unemployment, illness -- it doesn't matter. You may be able to negotiate a payment plan, but under most circumstances you can't discharge a defaulted student loan in bankruptcy.

Garnishee: This has nothing to do with parsley or lemon wedges. Under federal law, a guarantee agency can garnishee (divert from your bank account to theirs) up to 15 percent of wages to repay defaulted student loans, without taking you to court. While they're at it, they can seize tax refunds, federal disaster relief payments, or Social Security and federal disability assistance. Other consequences include ruined credit, inability to be approved for a mortgage or car loan, loss of your professional license or government security clearance, and those annoying calls from collection agents. Normally, as the Supreme Court affirmed in 2005, there is no statute of limitations on collecting a defaulted student loan.

Ombudsman: Sounds like a superhero, and maybe she is. Debra Wiley, the federal student aid ombudsman, can help you resolve a complaint against a lender, as a last resort, when all other negotiation has failed. Let's say you were denied forbearance, for example, but you have ample evidence that you are ill and unemployed. The ombudsman can't help with private alternative student loans, only federal loans, and can't necessarily reverse a lender's decision, but they can communicate with lenders for you and help all sides arrive at a resolution.

Rehabilitation: This is not where Paris and Lindsay have to go. This means getting out of default. You can do this by applying for and signing an agreement to restart payments on your loans. Then you have to make at least nine payments. These must be consecutive, "reasonable and affordable," voluntary (no seized wages), on-time (within 20 days) payments. Then your rehabbed status is reported to credit bureaus, you become eligible for higher education aid once again, and you continue to repay the loan while a new lender purchases it and begins to service it. Congratulations!

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259 Comments

Showing comments 6-35 of 259<< PreviousNext >>
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  • Yahoo! Finance User - Tuesday, June 2, 2009, 12:27AM ET  Report Abuse

    • Overall: 4/5

    Qaulity Information.

  • Yahoo! Finance User - Wednesday, April 15, 2009, 7:22PM ET  Report Abuse

    • Overall: 1/5

    a fraud.

  • Yahoo! Finance User - Tuesday, March 17, 2009, 8:35AM ET  Report Abuse

    • Overall: 5/5

    Very helpful, clear information, as usual. Thanks!

  • Yahoo! Finance User - Thursday, March 12, 2009, 11:56AM ET  Report Abuse

    • Overall: 5/5

    This is the info. we all need to know... thank you... Jaime

  • Yahoo! Finance User - Monday, March 2, 2009, 6:30PM ET  Report Abuse

    • Overall: 1/5

    If you think DJIA 6,763 is bad, JUST WAIT UNTIL 1Q09 Earnings come out!!!!!!!! SAVE YOURSELVES AND HOLD GOLD AND CASH and hope!!! even another Stimulus or Bailout or Tax cut or Rate cut won't save you now.... may Obama bless us all, amen.

  • Yahoo! Finance User - Thursday, January 8, 2009, 12:19AM ET  Report Abuse

    • Overall: 5/5

    I appreciated this article and would like more simple to read ones about student loan repayment - thank you

  • Yahoo! Finance User - Friday, December 12, 2008, 5:46PM ET  Report Abuse

    • Overall: 2/5

    WOW! This makes me want to take out a nice big loan and buy a sports car! Thanks lady!

  • Yahoo! Finance User - Wednesday, December 3, 2008, 11:20PM ET  Report Abuse

    • Overall: 4/5

    Some good poins here. I didn'tt know about IBR. Live and learn. No matter how much you make - i hurts to see the money go towars school loans. Call me a "stinge" but even though I might be able to pay the student loan confortably - I still hate writing the checks every month.

  • Yahoo! Finance User - Friday, October 31, 2008, 9:15AM ET  Report Abuse

    • Overall: 5/5

    What we have recently seein in the Market runup is a suckers rally. Most of the major players are still sitting on the sidelines waiting for a further retreat. Of course the stock market is forward looking but we are in for a double dip recession that could very well last for several years.The Dow will suffer steep losses again and we have not seen bottom

  • Yahoo! Finance User - Wednesday, October 29, 2008, 11:43AM ET  Report Abuse

    • Overall: 3/5

    Is comrade Kamenetz waiting to see how the election turns out to say something new?

  • Yahoo! Finance User - Sunday, October 12, 2008, 5:06PM ET  Report Abuse

    • Overall: 5/5

    Yahoo Finance: Please post a new article by Anya about the financial crisis! There is so much concern for homeowners and their crushing debt - but not a peep about crushing student loan debt, which unlike a mortgage, can't be discharged. The bailout package is to be paid through young people's taxes, even though it the problems were mostly caused by older generations. Anya! Please post!

  • Yahoo! Finance User - Sunday, October 12, 2008, 9:28AM ET  Report Abuse

    • Overall: 4/5

    Very informative for a parent's perspective. It would have received 5 starts if the author had not started each paragraph with the assumption that the readers were still at the comic book stage of their lives. (Hint: the majority of people that read articles like this may still enjoy a good comic book, but they read financial articles to obtain financial information).

  • Yahoo! Finance User - Saturday, October 4, 2008, 12:18PM ET  Report Abuse

    • Overall: 4/5

    It is really great if someone is able to make millions by being an entrepreneur and running their own business. I admire that. But don't knock higher education. Not everyone is an entrepreneur, and this nation, this society, still needs professionals. Higher education is the engine that drives this country, and any country. There is a reason that countries with poor education are third world. We still need civil engineers to build and maintain our infrastructure. We still need doctors to take care of our sick. We still need chemists to do laboratory research to determine if we can distribute products to the masses. We still need skilled pilots to fly planes and take us to various destinations. Anyone that made millions as an entreprener would not have been able to do so without the economy that we have built on all of these professions and specializations. Some of these people had to take out student loan debt because not everyone wants to be an entreprenuer. Let the entrepreneurs find a doctor to treat their illnesses who has not gone to medical school. I bet they would be singing a different tune about higher education. Let the entrepreneuer climb aboard a commercial air craft with some random untrained person who did not go to flight school. Bet it would not happen. Let the entrepreneuer take a dose of medicine without it being verified as safe to take by a chemist or a pharmacist or some kind of health specialist. Let the entrepreneur have uneducated legal counsel represent him in a criminal or civil trial. I bet they would not be against higher education anymore. They only speak ill of it because they made it without going to school, and laugh at thse who wanted to go to school and had to finance it. But just remember that you would not have made it in this capitalist nation if there had not been others to develop the infrastructure where you could do so. This nation needs trained and/or educated individuals and, here is the kicker, training and education costs money. Financing an education is no different than financing any other need. So before you point the finger at someone who had to finance their education, maybe you should consider how much you or your lifestyle depends on people who do have educations.

  • Yahoo! Finance User - Saturday, October 4, 2008, 11:59AM ET  Report Abuse

    • Overall: 3/5

    I am not going to feel bad for taking out student loans and making payments on them for the next 10 years. Even after considering my payments, I am better off after graduating college. No matter how smart or how driven I was before graduation, there were just some opportunities I would NEVER have been considered for. I have used student loans to go to college and graduate school. I have since received professional licensing and make a good income. Anyone who tells me my investment would have been better spent somewhere else is on crack. I didn't have the dollars TO invest before finishing college. People who say college is overrated are resentful slackers who could not make it through college. I am not going to feel guilty that I have some debt. I was not about to be left out of an education and opportunities because I didn't have the money to pay for it at the time. This article is helpful for people to consider some planning before taking out student loans, i.e., what field are you going in to, will it pay enough money to pay the loans back, etc. If I wanted to go into a field where I knew I would not make that much money, I would have gone to a cheaper state school or community college. Because I knew my profession paid well, I went to a private school with a good reputation knowing I would be able to pay my loans back. I haven't defaulted on them and don't plan to. I am able to save money by living within my means, and I am MUCH better off than my friends who didn't go to college because of the cost. The choice was clear for me. I could have either spent 20 years obtaining enough experience to qualify for a high paying job, or I could go to college for 4 years or so, a year in grad school, and then work a couple of years to get a similar paying job. I worked full time while going to school too, so I did not forego income in lieu of paying for school, a typical argument against going to school for four years. Tell a doctor or an attorney with student loan debt that it was a waste of their investment. I am not the one who has to work two jobs busing tables and selling fragrances at mall just to make my rent. Student loans have their purpose for those who take them seriously, plan accordingly, and do not abuse them. They provide opportunities and education to people who otherwise would not have them. I wish people would stop attacking student loans and asking if college was worth it; you can't make sweeping generalizations for the entire populace that student loans are evil. In my case, it was much more responsible than taking out a mortgage on a house that I could not afford. If someone took out student loans and dropped out or didn't secure proper employment after school to pay for them can only blame themselves for their problems and lack of planning, not Sallie Mae or the colleges. A college degree is not a guarantee of employment but is certainly does improve your chances if you are smart about it.

  • Yahoo! Finance User - Thursday, October 2, 2008, 12:00AM ET  Report Abuse

    • Overall: 1/5

    this article is very useless!!!!

  • Yahoo! Finance User - Monday, September 22, 2008, 8:07AM ET  Report Abuse

    • Overall: 1/5

    Not only is this article a repeat but if you've signed for a loan of ANY type you should have known the terminology BEFORE SIGNING. Why does this remind me of the mortagage problems????

  • Yahoo! Finance User - Saturday, September 20, 2008, 9:41PM ET  Report Abuse

    • Overall: 1/5

    I laugh at all the poor schleps who have 80k in school loan payments just to become a teacher or some middle of the road job. You would of been better off not going to college then just buying a house in a year or two. I know 8 people who went to college to become teachers, they graduated, have a tab of about 80 - 100k now, and cant find a job for the life of them. College is way overrated. It not wonder many wall street firms or hedge funds on Wall st. say that they want people to work for them that didnt go to college!

  • Yahoo! Finance User - Friday, September 19, 2008, 9:06PM ET  Report Abuse

    • Overall: 5/5

    EXCELLENT journalism. I work in a field that handles student loans at the federal level. If people plan to take out a student loan reading this report would sober them up. Can we hear from the people who take out student loans, work for a living and have the financial means to repay the loan AND refuse to?

  • Yahoo! Finance User - Thursday, September 18, 2008, 12:37AM ET  Report Abuse

    • Overall: 1/5

    The comments are more interesting than the article.

  • Yahoo! Finance User - Wednesday, September 17, 2008, 10:06AM ET  Report Abuse

    • Overall: 1/5

    "Garnishee" is a noun not a verb! The government can GARNISH your wages, in which case you become the GARNISHEE. This article is a mess!

  • Yahoo! Finance User - Wednesday, September 17, 2008, 9:15AM ET  Report Abuse

    • Overall: 1/5

    Yahoo! has an eye candy dynamic for its business/finance content. Anya and the Lacy chicky don't exactly make the value add part of the site. The guy at Salon or Slate that called Anya "annoying" made his call a little early -- he should have included the Ms. Lacy in the adjective.

  • Yahoo! Finance User - Wednesday, September 17, 2008, 12:01AM ET  Report Abuse

    • Overall: 1/5

    Its sad that Yahoo finance puts this dreck on its front page for 9 DAYS... wow...

  • Yahoo! Finance User - Tuesday, September 16, 2008, 6:19PM ET  Report Abuse

    • Overall: 1/5

    Please do us a favor and stop writing. BAAAARRFFF

  • Yahoo! Finance User - Tuesday, September 16, 2008, 10:51AM ET  Report Abuse

    • Overall: 1/5

    I normally think people are too hard on Anya, who is writing for a SPECIFIC audience, but I think she's finally jumped the shark and landed in stupid waters. Awful.

  • Yahoo! Finance User - Monday, September 15, 2008, 2:04PM ET  Report Abuse

    • Overall: 1/5

    Crap. This does not describe your article or writing style. Oh wait, yes it does.

  • Yahoo! Finance User - Monday, September 15, 2008, 1:47PM ET  Report Abuse

    • Overall: 1/5

    Wow. You are a terrible writer.

  • Yahoo! Finance User - Monday, September 15, 2008, 12:30PM ET  Report Abuse

    • Overall: 2/5

    Regrettable: And I don't mean that night you had one too many with your boss. I mean this article. Some decent information clouded by poor style, you should regret writing it.

  • Yahoo! Finance User - Monday, September 15, 2008, 12:23PM ET  Report Abuse

    • Overall: 2/5

    No need for the repeated "this is not a..." joke, it wasn't funny the first time. This info is helpful, but seems geared towards mainly to people who are going to or who already have trouble repaying student loans. I'm considering going back to school and could use information on how to NOT become the type of person who would need this list.

  • Yahoo! Finance User - Monday, September 15, 2008, 5:27AM ET  Report Abuse

    • Overall: 1/5

    Very badly written - too condescending and this distracts from the issue under discussion. Stick to the points and cut out the vapid "explanations" of what each term means. I felt I was reading something from an overbearing first grade teacher who supposed that the reader was dumb.

  • Yahoo! Finance User - Saturday, September 13, 2008, 10:34PM ET  Report Abuse

    • Overall: 1/5

    Bad writer :This has nothing to do with parsley..." Just get to the facts without the poof.

Showing comments 6-35 of 259<< PreviousNext >>

More from Anya Kamenetz

Read the Generation Debt Book

According to economics professor Laurence J. Kotlikoff, Generation Debt offers "a truly gripping account of how young Americans are being ground down by low wages, high taxes, huge student loans, sky-high housing prices, not to mention the impending retirement of their baby boomer parents." Generation Debt will inspire you to take charge of your financial future.

Read more from Anya Kamenetz here and here.

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