Even though more than half of college graduates under age 25 are unemployed or underemployed, there are other reasons to why a TransUnion study found that more than half of student loan accounts are in deferred status: The large loan amounts don’t register with them, says Tom Yarnell, director of financial aid at Otterbein University in Westerville, Ohio.
“I don’t think they realize how long it takes to pay it back and the amount they’ll have to pay back,” Yarnell says.
“Students at that age level have their eyes on something other than the borrowing amount and are pretty sure they’ll be able to get a job and pay the loan back,” he says.
The loan amounts can be overwhelming. Student loan balances increased 75% between 2007 and 2012, with the average debt per borrower increasing by 30% to $23,829, according to the TransUnion study.
But there is some good news for students — for those who have federal student loans, anyway. The loan interest rates on those loans are lower than private loan interest rates because they are subsidized by the federal government, and borrowers have more legal rights with federal loans than they do with private loans. Here are nine rights students have for federal loans:
1. The right to loan counseling. Federal laws require loan providers to spell out the terms of loans to borrowers, but student loans are unique because they require borrowers to complete entrance and exit counseling before and after they get a loan so that they understand the terms, says Helen Nunn, director of financial aid at Susquehanna University in Selinsgrove, Pa. The National Student Loan Data System provides online counseling to help understand loan terms and rights and responsibilities of repayment.
“Once they get that far into the funnel, that they’re actually signing up and receiving loan funds, there’s quite a bit of information and counseling they have to do,” Nunn says.
2. Right to contact your loan servicer. This right applies to all types of loans; you can contact your loan provider any time you want. But with student loans, the servicers that are contracted by the Department of Education to coordinate billing make it easy to contact them to answer questions, Nunn says. They also provide a lot of information that students may not even read, but will help them, says Greg Gearhart, director of financial aid at Messiah College in Grantham, Pa.
“There are lots of rights and responsibilities that students have with their loans, but they get all of that information as part of their Master Promissory Note and the loan entrance and exit counseling processes,” Gearhart says.
“The loan servicer sends them all kinds of disclosures,” he says. “On that basis, you could say that they already know everything they need to know, but it is true that we constantly joke about how students don’t need anything we send them and I’m sure any given student you ask might not know of something she should.”
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3. Right to defer payment. If you’re in graduate school or the military, loan payments can be deferred until you’re out. A hardship deferment can also be given to the unemployed, or forbearance if a borrower is sick and unable to work. A forbearance allows monthly payments to be discontinued or shrunk for up to 12 months. Interest will still accrue during the time off from the loan.
4. Right to pay based on what you earn. There are a few programs that can help with loan payments if you can’t afford the loans you have. The “pay as you earn” plan puts the monthly payment at 10% of your discretionary income based on your income and family size. The “income-based repayment plan” is based on 15% of discretionary income.
The “income-contingent repayment” plan is based on 20% of monthly discretionary income and is meant for low income borrowers who don’t qualify for the other plans. Under the plans, if the balance isn’t paid off by the end of the loan terms (20 to 25 years), then the remainder is forgiven.
5. Right to consolidate loans. If you have several federal student loans, you can consolidate them into a single monthly payment, making bill paying easier.
6. Right to loan forgiveness. If you work in law enforcement, early childhood education, public health, emergency management, the military, school-based services or such government jobs, you may be eligible to have your student loan balance forgiven if you’ve made 120 payments under the Public Service Loan Forgiveness Program.
Teachers in low-income communities can have up to $17,500 in loans forgiven under the Teacher Loan Forgiveness Program.
7. Right to change payment schedule. The standard loan payment schedule is for 10 years. An extended repayment plan can increase it to 25 years, which will decrease the monthly payment but increase the interest paid on the loan. For the grad with an increasing income, payments can be graduated and start low with increases every two years.
8. Right to deduct interest. By following IRS rules, federal student loan interest payments can be deducted from taxable income.
9. Right to repay early. This may sound like a no-brainer, but it’s a right that borrowers don’t always have. Student loans can be repaid early with no penalty.
Federal student loan delinquency rates rose 27% from 2007 to 2012, according to TransUnion, while private loan delinquency rates dropped 2% during the same time. The potential worry, a TransUnion official says, is that such high delinquency rates for student loans could spill over into mortgages and other debt.
Student loan borrowers who know their rights, hopefully, won’t fall into such holes.
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