A look at student loan repayment options

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(MoneyWatch) Last week, I wrote about what to think about when the time comes to repay student loans. When it comes to repayment options, student loans offer more flexibility and repayment options than any other debt and credit obligations. There are many options available to borrowers looking to make their student loan payments more manageable. Here are a few.

Request Deferments or Forbearance: Lenders may agree to postpone repayment - they allow you to make no payments for up to three years for federal loans (due to unemployment, economic hardship, attending school at least half time, serving on active duty in the military, etc) and up to one year for private loans. This even applies when you elect to go back to graduate school. While in forbearance, interest on subsidized federal loans does not have to be repaid but interest continues to accrue for unsubsidized loans. Because the interest continues to accrue on most loans in forbearance, this option should only be used for short-term periods of time. One important thing to keep in mind: You have to continue making payments on your student loan until you have been notified that your request for deferment has been granted. If you don't, and your deferment is not approved, you will become delinquent and may default on your loan.

Consider Income-Based Repayment: An option for federal loans (which includes Stafford loans, Perkins loans and Grad Plus loans) is the income-based repayment plan, or IBR. Under this option, the loan payment can be as low as zero and is capped at 15% of discretionary income (defined as your income that exceeds 150% of the poverty line). Borrowers whose total debt exceeds their annual income are likely to qualify for this option. Under this option, any loan balance that remains after 25 years of payments is forgiven, but you'll owe tax on the forgiven amount. Check out the IBR calculator to see if you qualify for this option.

Consolidation Loan: One way to make your student loan payments more manageable is through loan consolidation, which allows borrowers with qualifying student loans to combine all of their loans from various lenders into one single loan with a single lender. The main benefit of consolidation of your student loans into a single loan is that you will have the convenience of making a single loan payment and that payment will be lower than the total of the payments on all of the individual loans before consolidation. While this makes it easier to repay your loans, you will be paying more in interest over the life of the loan because you will be extending your repayment time. Use the tools at the Federal Student Aid web site to compare the numbers for your loan situation. Some consolidation loan providers also offer discounts for signing up for automatic payments and making payments on time. Before you shop around for a consolidation loan, you'll want to check to see if this will save on the interest rate. The rate for the consolidation loan is the weighted average of the variable rates on your existing loans, typically rounded up by the next eighth of a percentage point.

Finally, if you are struggling to keep up with the payments on your student loans, then talk to your lender. Speak to them BEFORE you stop making any payments. If you default before contacting your lender, they may play hardball and begin a court action to commence collection proceedings. If you are sued and lose, the lender can garnish your wages, put a lien on your property and take money from your bank accounts. Lenders hoping to avoid these situations may offer alternatives such as interest only repayment or stretching out repayment to make payments more affordable.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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