Managing Loan Debt

When you graduate or leave school

Leaving school:  graduating, withdrawing, or dropping below half time

Once you are no longer enrolled at least half time in an eligible program, you’ll receive a 6-month grace period (see below) on your Direct Subsidized and Unsubsidized Loans during which you are not required to make loan payments. You must begin repayment at the end of your grace period.

If you have an in-school deferment on a Direct Subsidized or Unsubsidized Loan that entered repayment at an earlier date (before you returned to school) and you graduate, drop below half-time enrollment, or withdraw from school, you will be required to immediately begin making payments on the loan because the 6-month grace period has already been used up; there is no second grace period.

Make sure that both your school and loan servicer know that you are no longer enrolled. If you don’t begin making payments when required, there is the possibility that you will lose repayment incentives you may have received or even go into default.

Your school is required to ensure that you receive exit counseling before you graduate or withdraw. Check with your school to see how exit counseling is conducted, whether as a personal or group exit interview or as a session that you can complete online, for example, at the www.studentaid.gov.

Grace periods

When you graduate, drop below half time, or withdraw from your academic program, you will receive a six-month grace period for your Direct Subsidized and Unsubsidized Loans. Your grace period begins the day after you stop attending school on at least a half-time basis. Once your grace period ends, you must begin repaying your loan(s).

If you re-enroll in school at least half time before the end of your 6-month grace period, you will receive the full 6-month grace period when you stop attending school or drop below half-time enrollment.

There is no grace period for Direct PLUS Loans – the repayment period for a PLUS Loan begins on the day after the final loan disbursement is made. However, if you’re a graduate or professional student PLUS borrower (or if you’re a parent PLUS borrower who is also a student), you can defer repayment while you’re enrolled in school at least half time and (for Direct PLUS Loans first disbursed on or after July 1, 2008) for an additional 6 months after you graduate or drop below half-time enrollment.

If you’re a parent PLUS borrower, you can defer repayment of Direct PLUS Loans first disbursed on or after July 1, 2008, while the student for whom you obtained the loan is enrolled at least half time, and for an additional 6 months after the student graduates or drops below half-time enrollment.

Remember, if you choose to defer payment on a Direct PLUS loan, any interest that accumulates during the deferment period will be added to the unpaid principal amount of your loan. This is called “capitalization,” and increases your debt because you’ll have to pay interest on this higher principal balance.

Reservists Called to Active Duty:  If you are called or ordered to active duty for more than 30 days from a reserve component of the U.S. Armed Forces, the period of your active duty service and the time necessary for you to re-enroll in school after your active duty ends are not counted as part of your grace period. However, the total period that is excluded from your grace period may not exceed three years. If the call or order to active duty occurs while you are in school and requires you to drop below half-time enrollment, the start of your grace period will be delayed until after the end of the excluded period. If the call or order to active duty occurs during your grace period, you will receive a full 6-month grace period at the end of the excluded period.

If you are a reservist called to active duty with the U.S. Armed Forces for more than 30 days, contact your loan servicer to let them know your status.

Choosing a repayment plan

You’ll have the choice of several plans, and the loan servicer will notify you of the date your first payment is due. If you do not choose a repayment plan, you will be placed on the standard repayment plan. Most Direct Loan borrowers choose to stay with the standard repayment plan, but there are other options for borrowers who may need more time to repay or who need to make lower payments at the beginning of the repayment period.

Consolidation

If you have multiple federal education loans, you can consolidate them into a single Direct Consolidation Loan. This may simplify repayment if you are currently making separate loan payments to different loan holders, as you’ll only have one monthly payment to make. There may be tradeoffs, however, so you’ll want to learn about the advantages and possible disadvantages of consolidation before you consolidate. To learn more, visit our Direct Consolidation Loan website.

While you’re in repayment

Generally, you’ll have from 10 to 25 years to repay your loan, depending on which repayment plan (there are several) you choose.

The loan servicer will notify you of the date your first payment is due. If you do not choose a repayment plan, you will be placed on the standard repayment plan, with fixed monthly payments for up to 10 years. Most Direct Loan borrowers choose to stay with the standard repayment plan, but there are other options for borrowers who may need more time to repay or who need to make lower payments at the beginning of the repayment period.

You can change repayment plans at any time by contacting your loan servicer.

Automated payments (electronic debit)

When you receive your first bill, you’ll learn how you can sign up for the electronic debit account (EDA) option and have your bank automatically make your monthly loan payments for you from your checking or savings account. You won’t have to write checks, use stamps, or worry if your payment will arrive by the due date. In addition you’ll receive a 0.25% reduction in the interest rate on your loans during any period when your payments are made through EDA.

Trouble making payments

If you’re having trouble making payments on your loans, contact your loan servicer as soon as possible. Their staff will work with you to determine the best option for you. Options include:

• Changing repayment plans.
• Deferment, if you meet certain requirements. A deferment allows you to temporarily stop making payments on your loan.
• Forbearance, if you don’t meet the eligibility requirements for a deferment but are temporarily unable to make your loan payments. A forbearance allows you to temporarily stop making payments on your loan, temporarily make smaller payments, or extend the time for making payments. Read more about deferments and forbearance.

If you stop making payments and don’t get a deferment or forbearance, your loan could go into default, which has serious consequences – see below.

Your loan first becomes “delinquent” if your monthly payment is not received by the due date. If you fail to make a payment, you’ll receive a reminder that your payment is late. If your account remains delinquent, you’ll receive warning notices reminding you of the consequences of default and of your obligation to repay your loans.

If you are delinquent on your loan payments, contact your loan servicer immediately to find out how to bring your account current. Late fees may be added, and your delinquency will be reported to one or more national consumer reporting agencies (credit bureaus), but this is much better than remaining delinquent on your payments and going into default.

Consequences of default

If you default:

• We will require you to immediately repay the entire unpaid amount of your loan.
• We may sue you, take all or part of your federal and state tax refunds and other federal or state payments, and/or garnish your wages so that your employer is required to send us part of your salary to pay off your loan.
• We will require you to pay reasonable collection fees and costs, plus court costs and attorney fees.
• You may be denied a professional license.
• You will lose eligibility for other federal student aid and assistance under most federal benefit programs.
• You will lose eligibility for loan deferments.
• We will report your default to national consumer reporting agencies (credit bureaus).

For more information and to learn what actions to take if you default on your loans, see the website for the Department’s Default Resolution Group.

Loan cancellation (forgiveness or discharge)

Under conditions, you can have all or part of your loan cancelled or discharged. Read more about loan cancellation.

What’s next?

Stay in touch with the loan servicer – let them know if you’ve changed your name or permanent address, and make sure that they know when you’ve completed your educational program or transferred to another school.

Repayment plans

The Direct Loan Program offers loan repayment plans designed to meet the needs of almost every borrower. Direct Loans are funded by the U.S. Department of Education through your school and are managed by a loan servicer, under the supervision of the Department. The Direct Loan Program allows you to choose your repayment plan and to switch your plan if your needs change.

To find out more about repayment options before receiving a Direct Loan, borrowers may contact their school’s financial aid office or the Federal Student Aid Information Center at 1-800-4-FED-AID (1-800-433-3243). If you currently have a Direct Loan and would like the exact payment amount on your loan, you can find it out by contacting your loan servicer.

Parent Direct PLUS Loan borrowers may only choose from the standard, extended, or graduated options, but student Direct PLUS Loan borrowers may also choose the income contingent repayment plan or the income-based repayment plan.

Standard Repayment

With the standard plan, you’ll pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50, and you’ll have up to 10 years to repay your loans.

The standard plan is good for you if you can handle higher monthly payments because you’ll repay your loans more quickly. Your monthly payment under the standard plan may be higher than it would be under the other plans because your loans will be repaid in the shortest time. For the same reason – the 10-year limit on repayment – you may pay the least interest.

Extended Repayment

To be eligible for the extended plan, you must have more than $30,000 in Direct Loan debt and you must not have an outstanding balance on a Direct Loan as of October 7, 1998. Under the extended plan you have 25 years for repayment and two payment options:  fixed or graduated. Fixed payments are the same amount each month, as with the standard plan, while graduated payments start low and increase every two years, as with the graduated plan below.

This is a good plan if you will need to make smaller monthly payments. Because the repayment period will be 25 years, your monthly payments will be less than with the standard plan. However, you may pay more in interest because you’re taking longer to repay the loans. Remember that the longer your loans are in repayment, the more interest you will pay.

Graduated Repayment

With this plan your payments start out low and increase every two years. The length of your repayment period will be up to ten years. If you expect your income to increase steadily over time, this plan may be right for you. Your monthly payment will never be less than the amount of interest that accrues between payments. Although your monthly payment will gradually increase, no single payment under this plan will be more than three times greater than any other payment.

Income Contingent Repayment

(Not available for parent PLUS loans)

This plan gives you the flexibility to meet your Direct Loan obligations without causing undue financial hardship. Each year, your monthly payments will be calculated on the basis of your adjusted gross income (AGI, plus your spouse’s income if you’re married), family size, and the total amount of your Direct Loans. Under the ICR plan you will pay each month the lesser of:

1. The amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or
2. 20% of your monthly discretionary income*.

If your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized.

The maximum repayment period is 25 years. If you haven’t fully repaid your loans after 25 years (time spent in deferment or forbearance does not count) under this plan, the unpaid portion will be discharged. You may, however, have to pay taxes on the amount that is discharged.

Income-based Repayment

Under this plan the required monthly payment will be based on your income during any period when you have a partial financial hardship. Your monthly payment may be adjusted annually. The maximum repayment period under this plan may exceed 10 years. If you meet certain requirements over a specified period of time, you may qualify for cancellation of any outstanding balance of your loans.

*Monthly discretionary income equals your AGI minus the poverty level for your state of residence and family size, divided by 12. For the current poverty level, see the Poverty Guidelines Chart, which is issued annually by the U.S. Department of Health and Human Services.

Deferment and Forbearance

If you want additional information on loan default, visit the Department’s Debt Collection Service website.

Deferments

A deferment is a postponement of payment on a loan, during which interest does not accrue if the loan is subsidized.

You may qualify for a deferment while you are:

• Enrolled at least half time in an eligible postsecondary school or studying full time in a graduate fellowship program or an approved disability rehabilitation program.
• Unemployed or meet our rules for economic hardship (limited to 3 years).

You may also be eligible for a deferment based on qualifying active duty service in the U.S. Armed Forces or National Guard. Refer to the MPN for your loan or contact the Direct Loan Servicing Center for more information about specific qualifications for deferment based on military service.

In most cases, you need to submit a deferment request to your loan servicer along with documentation of your eligibility for the deferment.

If you’ve gone back to school and your loan servicer receives enrollment information that shows you’re enrolled at least half time, it will automatically put your loans into deferment and notify you. You have the option of cancelling the deferment and continuing to make payments on your loan.

If you are in default on your loan, you are not eligible for a deferment or forbearance.

Forbearance

If you can’t make your scheduled loan payments, but don’t qualify for a deferment, we may be able to give you a forbearance. A forbearance allows you to temporarily stop making payments on your loan, temporarily make smaller payments, or extend the time for making payments. Some common reasons for getting a forbearance are illness, financial hardship or serving in a medical or dental internship or residency. See your copy of the Borrower’s Rights and Responsibilities Statement for more examples. You can get more information by contacting your loan servicer.

Under certain circumstances, we can automatically give you a forbearance, for instance, while we’re processing a deferment, forbearance, cancellation, change in repayment plan or consolidation, or if you’re involved in a military mobilization or a local or national emergency.

The following website is available for additional information regarding your student loan:

https://studentaid.gov/

In addition, please feel free to contact the Financial Aid Office at Carnegie Institute for assistance.

What To Do

If you owe money you cannot repay, you need a plan. Do not ignore the problem. There are people who can help you.

Where do I start?

• Make a budget
  • Write down what you make
  • Look at where your money goes
    • include rent, car payment, insurance, utilities, food, gas credit care bills, other bills
  • Look for ways to spend less
• Call the companies where you owe money
  • Explain why you have trouble paying the bill
  • Ask for a plan to pay less each month

Call the company before it sends your debt to a debt collector. Many debt collectors will not accept a payment plan.

How can I get help?

Credit counselors can help you make a budget. They can also help you plan to repay your debt. Look for a credit counselor who will meet you in person. Then ask questions. These questions will help you select a counselor:

• What can you do to help me?
• How much will I have to pay?
• Do you have free education and information
• Are you licensed to work in my state?

A good counselor will not promise to fix all of your problems.

Look for a credit counselor who can do the most for you. You might have to pay some money for help. But a good credit counselor will not ask you to pay in advance.

What is a debt management plan?

A “debt management plan” is one way to repay money you owe. Here is how it works:

• A credit counselor works with you and the companies you owe money to.
• You all agree to a plan for how you will repay the money you owe.
• Sometimes the companies agree to a lower interest rate; sometimes they do not.
• Every month, you deposit money into an account with the credit counselor and the credit counselor pays your bills
• This continues until your debt is repaid.

What is a debt settlement plan?

Some people say a “debt settlement plan” is a way to repay money you owe. But many companies that offer these plans make promises they cannot keep. Many people who use debt settlement plans find they owe more money, not less. These companies charge you a lot of money, and then they do not help you.

What do I do about calls from debt collectors?

When you talk to a debt collector:

• Keep a notebook by your phone or with you
• Ask: What is your name, company, address, and phone number? Write the answers. Write the date and time you talked,
• Say: I will only talk when I get the written validation notice.
• If the collector threatens you or uses bad language, hang up. He is breaking the law.
• You can file a complaint about a debt collector by calling the Federal Trade Commission at 1-877-382-4357

When you get the validation notice:

• See if you recognize the debt. The notice should list the “creditor”. The creditor is the person you owe the money to. You can call the creditor to get more information.
• If you do not think the debt is yours, follow the instructions in the notice. It should tell you what to do next to question the debt.
• If the debt is yours, make a plan for how to pay it. Talk to a credit counselor.

If you want the collector to stop calling:

• Write a letter to the debt collector. Tell him to stop calling you immediately. Send the letter by Certified Mail and ask for a “return receipt”. The law says he must stop calling you when he gets your request in writing.

If that debt collector still calls, file a complaint. Call the Federal Trade Commission at 1-877-382-435.

Stopping calls does not mean the debt goes away. The debt collector might sue you to collect money. If you are being sued, you should get a notice in the mail. Do not ignore notices about a lawsuit. If do you do not go to court, you automatically lose.

For additional consumer information visit www.mymoney.gov; www.consumer.gov.