Student Loans We know that student loans are something that most medical professionals acquire throughout schooling. Here are some common questions and answers that many people have about student loans! Question: I’m having trouble paying my student loans. What should I do? Answer: The first thing you need to do is to make your lender aware of your situation. Confronting the problem is probably the most beneficial thing you can do. If you are having financial difficulties or are otherwise unable to pay your student loans, you can temporarily postpone your loan repayment by requesting either a deferment or a forbearance from your lender. Although they are often seen as the same, deferment and forbearance are different options. With a deferment, your lender grants you a reprieve from your loan payments based on a specific condition such as unemployment, a temporary disability, a return to school, or a similar situation. Your lender can tell you which conditions qualify for deferment. In most cases, the federal government pays the interest on your loan so the balance does not increase during the deferred period. With a forbearance, your lender grants you--at its discretion--permission to reduce or stop your loan payment for a period of time. Interest continues to accrue on your loan, and you'll still have to pay off both the accrued interest and the loan when you resume your payments. Although a deferment is preferable, a forbearance is often easier to get because it's not governed by the type of your loan or the date you obtained it. A deferment and forbearance are usually granted for a six-month period. But there is usually a limit to the number of times they are granted during the course of your loan. You'll need to apply for them with the appropriate paperwork from your lender. You may also need to reapply periodically to maintain your eligibility. Another option if you are having trouble repaying your student loans is to ask your lender about different repayment options. The standard ten-year repayment plan is not your only option. For example, under an extended repayment plan option, you extend the number of years you have to repay your loan. The result is a lower monthly payment, which might help you out of a financial jam now. However, keep in mind that you will pay more interest over the life of the loan due to the longer term. Or, consider one of the federal government's income-driven repayment programs. Under these programs, monthly student loan payments are based on discretionary income and family size, and borrowers can have their remaining debt forgiven after a certain number of on-time payments. Finally, you can try to have your student loans permanently canceled. This means that you don't have to repay them at all; the loans are permanently removed from your financial obligations. However, cancellations don't come easily. They are usually granted based on a specific condition, such as the borrower's death or permanent disability, or based on certain types of employment, such as teaching in needy areas. Contact your lender to see what the rules are for loan cancellation. If you can't negotiate a reprieve with your lender, you'll be in default on your student loans. It is important to note that the government tracks defaults, and nonpayment can have a negative impact on your financial future. If you need help getting your finances under control, we can help. Question: How will I ever pay off my student loans? Answer: As the cost of post-secondary education continues to increase and you take on further student loan indebtedness to pay for it, you may feel as if you are leaving the ivory tower with a mortgage on your back. You may be surprised to discover that some or all of your indebtedness can be forgiven if you are employed in certain public-service sectors, teach in teacher-shortage areas, or go into the Peace Corps. If these choices aren't available to you, you must find a way to budget for your student loan payments. Review your household income and expenses. Can you reduce your spending on entertainment, luxuries, and discretionary items? If so, you can divert these saved funds toward monthly principal prepayment of your student loans, thus shortening the overall repayment term and saving on interest charges. You are always permitted to prepay the principal of student loans, partially or in full, without penalty. Would consolidating your loans or refinancing your loans make the payment schedule easier? Check with your current lender to see what options you might have. Can you devote a tax refund, gift money, or inheritance to principal prepayment? Even infrequent payments of this sort will ultimately reduce your loan balance and save you both time (repaying the debt) and money (the interest on the debt). Investigate different repayment options if you find yourself in financial difficulty. The federal government offers several income-driven repayment programs that tie your monthly student loan payments to the amount of your discretionary income and family size, with all debt being forgiven after a certain number of on-time payments. In addition, an extended repayment plan, where the loan term is extended more than ten years, can lower your monthly payment, though keep in mind you'll pay more interest over the life of the loan. Question: How do student loans impact your credit? Answer: If you've finished college within the last few years, chances are you're paying off your student loans. What happens with your student loans now that they've entered repayment status will have a significant impact--positive or negative--on your credit history and credit score. It's payback time When you left school, you enjoyed a grace period of six to nine months before you had to begin repaying your student loans. But they were there all along, sleeping like an 800-pound gorilla in the corner of the room. Once the grace period was over, the gorilla woke up. How is he now affecting your ability to get other credit? One way to find out is to pull a copy of your credit report. There are three major credit reporting agencies, or credit bureaus--Experian, Equifax, and Trans Union--and you should get a copy of your credit report from each one. Keep in mind, though, that while institutions making student loans are required to report the date of disbursement, balance due, and current status of your loans to a credit bureau, they're not currently required to report the information to all three, although many do. If you're repaying your student loans on time, then the gorilla is behaving nicely, and is actually helping you establish a good credit history. But if you're seriously delinquent or in default on your loans, the gorilla will turn into King Kong, terrorizing the neighborhood and seriously undermining your efforts to get other credit. What's your credit score? Your credit report contains information about any credit you have, including credit cards, car loans, and student loans. The credit bureau (or any prospective creditor) may use this information to generate a credit score, which statistically compares information about you to the credit performance of a base sample of consumers with similar profiles. The higher your credit score, the more likely you are to be a good credit risk, and the better your chances of obtaining credit at a favorable interest rate. Many different factors are used to determine your credit score. Some of these factors carry more weight than others. Significant weight is given to factors describing: • Your payment history, including whether you've paid your obligations on time, and how long any delinquencies have lasted • Your outstanding debt, including the amounts you owe on your accounts, the different types of accounts you have (e.g., credit cards, installment loans), and how close your balances are to the account limits • Your credit history, including how long you've had credit, how long specific accounts have been open, and how long it has been since you've used each account • New credit, including how many inquires or applications for credit you've made, and how recently you've made them Student loans and your credit score Always make your student loan payments on time. Otherwise, your credit score will be negatively affected. To improve your credit score, it's also important to make sure that any positive repayment history is correctly reported by all three credit bureaus, especially if your credit history is sparse. If you find that your student loans aren't being reported correctly to all three major credit bureaus, ask your lender to do so. But even when it's there for all to see, a large student loan debt may impact a factor prospective creditors scrutinize closely: your debt-to-income ratio. A large student loan debt may especially hurt your chances of getting new credit if you're in a low-paying job, and a prospective creditor feels your budget is stretched too thin to make room for the payments any new credit will require. Moreover, if your principal balances haven't changed much (and they don't in the early years of loans with long repayment terms) or if they're getting larger (because you've taken a forbearance on your student loans and the accruing interest is adding to your outstanding balance), it may look to a prospective lender like you're not making much progress on paying down the debt you already have. Getting the monkey off your back Like many people, you may have put off buying a house or a car because you're overburdened with student loan debt. So what can you do to improve your situation? Here are some suggestions to consider: • Pay off your student loan debt as fast as possible. Doing so will reduce your debt-to-income ratio, even if your income doesn't increase. • If you're struggling to repay your student loans and are considering asking for a forbearance, ask your lender instead to allow you to make interest-only payments. Your principal balance may not go down, but it won't go up, either. • Ask your lender about a graduated repayment option. In this arrangement, the term of your student loan remains the same, but your payments are smaller in the beginning years and larger in the later years. Lowering your payments in the early years may improve your debt-to-income ratio, and larger payments later may not adversely affect you if your income increases as well. • If you're really strapped, explore extended or income-sensitive repayment options. Extended repayment options extend the term you have to repay your loans. Over the longer term, you'll pay a greater amount of interest, but your monthly payments will be smaller, thus improving your debt-to-income ratio. Income-sensitive plans tie your monthly payment to your level of income; the lower your income, the lower your payment. This also may improve your debt-to-income ratio. • If you have several student loans, consider consolidating them through a student loan consolidation program. This won't reduce your total debt, but a larger loan may offer a longer repayment term or a better interest rate. While you'll pay more total interest over the course of a longer term, you'll also lower your monthly payment, which in turn will lower your debt-to-income ratio. • If you're in default on your student loans, don't ignore them--they aren't going to go away. Student loans generally cannot be discharged even in bankruptcy. Ask your lender about loan rehabilitation programs; successful completion of such programs can remove default status notations on your credit reports. Question: Are my student loan payments taxes deductible? Answer: Your actual student loan payments aren't deductible, but the interest portion might be, thanks to the student loan interest deduction. In 2017, the maximum deduction is $2,500. You don't need to itemize to claim this deduction. To qualify, you must meet a few requirements: First, the student loan on which you're paying interest must be one that you incurred to pay college expenses when you were at least a half-time student. This requirement excludes part-time adult learners or other nontraditional students. Second, you must meet income limits. In 2017, to take the full student loan interest deduction, single filers must have a modified adjusted gross income (MAGI) below $65,000 and joint filers below $135,000. A partial deduction is available for single filers with an MAGI between $65,000 and $80,000 and joint filers with a MAGI between $135,000 and $165,000. Third, if you are claimed as a dependent on someone else's return, you can't take the deduction. If you are a dependent and your parent borrows money to pay for your college tuition, he or she may claim the student loan interest deduction. You should receive Form 1098-E from your lender showing the total amount of interest you paid for the year. If not, contact your lender to request this information. For more information on the student loan interest deduction, see IRS Publication 970.