Keeping your Student Loans under control while you’re away from school

Michael Lux Student Loan Blog, Student Loans 0 Comments

The traditional four-year education may work for some people, but life has a funny way of throwing a monkey wrench into our plans.  If you have already gotten some student debt and are thinking about taking some time off of school, you will want to make sure that you have in under control should you decide to take a year off.  The good news is that with some smart planning you can make sure that things don’t get out of control.

How it works

Like so many issues related to student loans, whether you have federal or private loans will make a big difference.  For federal student loans, individuals get a six month grace period when they graduate or drop below half time enrollment.  That means that if you take a year away from school, bills on your federal loans will start rolling in after six months.

Private loans will depend on the specific terms of the agreement between you and your lender, but most private loans also have a six month grace period similar to federal loans.

Each semester schools send an updated list to the federal government indicating students’ enrollment status.  When you take a break from school, your name will not appear on the list and the six month clock begins counting down.

When the first bill arrives

That first bill can be a scary moment, especially if it is for a large amount that you cannot afford.  Even if you think you have no chance at actually paying the bill, it is very important that you do not ignore it.  There are many options for lowering your payments that allow you to keep your loans under control and it prevents your student loans from crushing your credit score.

If you can afford the bill…

Pay it.  Don’t mess around with the forbearances, deferments, and graduated plans that will be described in the next section.  Each month you don’t pay your bill, interest grows, and your balance goes up.  If you are able to work and put a dent in your student loan debt while you are away from school, your future self will be very grateful.

If you cannot afford the bill…

If you have federal loans, your first option should be to enroll in an income based repayment plan.  At most you will be expected to pay 10 to 15% of your income towards your student loans.  If you have little or no income, your monthly payment could be $0 per month.  The downside is that your balance will grow each month.  The upside is that you won’t run into any late fees and your credit score will show that your loans are in good standing.  You also can count these $0 months towards student loan forgiveness.

Private loans are a bit more tricky.  Here again, the terms of your contract with your lender will make all the difference.  However, most lenders do offer a forbearance or a deferment for people who cannot afford their loans.  Lenders actually have a bit of an incentive to do this because the balance of the loan will grow.  If they give you a break now, they will make more money in the long run.  However, they are very careful not to let this go on forever, so the forbearances and deferments are often limited over the life of the loan.  That means you really don’t want to burn through them all if you are just trying to keep a little extra cash in your pocket.  Not having this option in the future could prove to be a huge mistake, plus you are just letting the interest grow when you balance is at its largest.

A final option with private loans is often a graduated repayment plan.  The good news here is that you can just pay down the interest and some of the principal, the bad news is that your payments in the future will be bigger.  This is a better option than a deferment, but it still does have consequences.

What happens when I go back to school?

Once you get back into school, your name will show up on enrollment lists and you will no longer be expected to be making payments on your student loans.  But remember, even if you don’t owe any money on the loans, it is still a good idea to pay some interest on the loan while you are in school.

One last thing to keep in mind is that once your grace period is up, it is gone forever.  That means if you take out new loans when you go back to school, things will be a little strange when you graduate.  Your old loans will have payments due right away, but the new loans will be on a six month grace period.

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