Understanding terms of student loans: Confronting student loan debt – Part 3
It is important to understand what you are signing up for when taking on a student loan. Default could affect credit, wages could be garnished.
This article is the third in a series about “Confronting Student Loan Debt.” The first two articles discussed identifying what type of student loans you might have as well as locating who is servicing your loan. This article will discuss understanding the terms of your loan.
When it comes to the terms of your student loan, investigate each loan’s grace period. The grace period is the time between when a borrower graduates, otherwise leaves school or drops below halftime enrollment and when he or she must begin repaying his or her loan. The grace period gives the borrower time to get financially settled and pick the appropriate repayment option. Not all federal student loans have a grace period given to loans such as a Parent Plus loan. Most loans have a grace period that ranges from six to nine months. If a borrower is called to active military duty for more than 30 days before the end of their grace period, they are eligible to receive the full six months grace period when they return from active duty.
If you fail to make payments on your student loans once the grace period is up you are in default of the loan’s contract and are subject to consequences. Because these loans are backed by the federal government you will always have to pay them back even if you were to file for bankruptcy. The federal government can garnish up to 15 percent of your wages and social security as well as any federal income tax refund. There will also be collection charges of up to 25 percent deducted from each payment that, in turn, increases the amount you will ultimately repay. Defaults will also be reported to the credit reporting agencies. Consequently, this can prevent a person from getting credit for other major purchases such as a home or car. It will also lead to ineligibility for additional federal financial aid and will prevent renewal of professional licenses.
It is extremely important to be fully informed about your obligation regarding repayment of student loans. Michigan State University Extension encourages everyone to take the time to understand their obligations, which can prevent situations of default and additional financial hardship. Read the promissory notes for each loan received or applied for to be clear about the responsibilities.
The next step is to learn the repayment options available for student loans. In the last couple of years the federal government has increased the options available to assist borrowers to successfully fulfill their obligations. This will be covered in an April article, Confronting Student Loan Debt- Part IV-Understanding and Choosing a Repayment Options.
Other stories in this series:
- Identify the type of student loans you owe: Confronting student loan debt – Part 1
- Locate who’s servicing your student loans: Confronting student loan debt – Part 2
- Know your repayment options: Confronting student loan debt - Part 4
- Consolidation, deferment, forbearance and forgiveness: Confronting student loan debt – Part 5
For additional information and resources on student loans go to: