With student loans, there are decisions to be made! And the tough part is even realizing that you are making a decision. Some of the things we’ll talk about today have defaulted to the wrong setting! Basically, if you don’t do anything, you’re making the wrong decision. As a result, these are common mistakes that recent graduates make and common missed opportunities that can help. 

We’ve discussed much of the borrowing phase of student loans, and as we begin to concentrate on the repayment phase, let’s look at some of the common issues and questions. 

What should you do with… 

The Grace Period 

Federal student loans have a 6 month grace period built in, that comes immediately after graduation. The theory is that the 6 month period gives the borrower time to find a job, move and settle in before beginning repayment. If you don’t do anything, your loans will automatically enter the grace period and your repayment phase will begin 6 months after graduation. 

For traditional repayment, the grace period can help provide some cushion, although interest will be accruing. But, if you are planning to utilize an income-driven repayment plan the grace period will work against you. Income-driven repayment is characterized by a set number of payments until the debt is forgiven. Once those payments are made, then the repayment is over regardless of whether the balance is paid off. Basically the faster you start, the faster you finish. But here’s why it can hurt you. Income-driven repayment plans use your previous year’s income to certify what your payments should be.  As a 4th year student, your income is low, possibly $0. The amount you pay on an income-driven repayment plan depends on your income. So if your income is low or $0, then your monthly payments are going to be $0. 

When you are a practicing veterinarian with 20 years of experience, then your income will not be low, and you will likely be making full payments. So, by starting your income-driven repayment plan, while using your student income, you are actually in the same place. You’ll be making $0 payments, while each of those months counts toward your payment count. At the end of your loans you’ll be able to finish a few months early! 

For some people, the savings may be up to $10,000! 

But - you have to do something! You have to tell your servicer to start the IDR plan and not apply the grace period to your loans. Not doing anything will cost you money.  

Deferral/Forbearance

Firstly, what is the difference between deferral and forbearance? 

They are very similar, and the main difference is that under deferment, the interest subsidized Federal loans won’t accrue and capitalize. Subsidized Federal loans are primarily from undergraduate programs. 

For unsubsidized loans, which are common among veterinary school student borrowers, forbearance and deferral mean the same thing, payments are paused, but interest continues to accrue and then capitalizes when repayment begins again. 

A deferral period allows a pause in student loan payments. For example, if you continue your education as an intern, resident, or another advanced degree, your loans could automatically defer, meaning that the servicer won’t try to collect them. But, during deferral, your interest will be accruing and will capitalize when payment begins. A deferral period could also begin if you become disabled, are laid off, or go through some other short-term hardship. 

If you are having a difficult time making payments, many times the loan servicer’s first question will be, “Do you want to defer your payments?” Meaning that you don’t have to do anything or make any payments during this time. This can be helpful for you to get back on track. 

But, if you are using an income-driven repayment plan, then a deferral period can hurt you. Why? Because the months that are in a deferral period don’t count toward your IDR month count. And the interest will be accruing on your unsubsidized federal loans. 

What is the solution? If you are on an IDR repayment plan, don’t allow your loans to go into deferral. You’ll need to call your servicer and recertify your income as lower or $0, to lower your monthly payments. 

If you are entering an internship, residency, or other advanced education, don’t allow your servicer to automatically defer your loans! You’ll need to speak with the servicer and put your loans into income-driven repayment. 

If you aren’t on an income-driven repayment plan and you are entering a time of economic hardship or are entering another education program, then it would likely behoove you to enter an income-driven repayment plan instead of using deferral or forbearance! 

Again, if you don’t do anything, the automatic setting can actually cost you more money! 

Delinquency/Default

Default and delinquency are bad things! Delinquency is when a borrower doesn’t make monthly loan payments on time. Once a loan becomes 90 days past due, then the student loan servicer will start reporting to the credit bureaus that the borrower is not making payments and their credit score will begin to drop. 

If the borrower doesn’t make payments for 270 days, then the loan enters default and a whole cascade of bad things begin to happen. When the borrower is in default, then deferment and forbearance are unavailable and the borrower’s ability to choose another repayment plan is taken away. Reports are given to the credit bureaus and the borrower’s credit score will drop and their ability to obtain more credit becomes limited. 

Lastly, lawsuits could be filed against the borrower and their wages could be garnished. 

These are all very bad things, so don’t let them happen to you! If you can’t make payments, always stay in touch with your servicers and request an income-driven repayment plan or forbearance/deferral at the least! 

The bottom line is to take positive action on your student loan repayments. Don’t let your servicer make decisions for you especially if you are on an income-driven repayment plan! You’ll need to know what these terms mean and how they can affect your long-term plans.