After graduating from college, you may end up paying a large percentage of your income to your school loans. Although most colleges try to secure loan funds through a minimal number of lenders, students often end up with loan funds owed to multiple entities. As each lender demands a minimum payment, your funds may not stretch far enough to pay down debts while reserving enough for living expenses.
Thankfully, you can roll your multiple federal student loans into a single account through the Direct Consolidation Loan program. The consolidated loan package may then qualify for inclusion in a repayment program to reduce your monthly debt obligations and even result in forgiveness of the remaining balance. Here’s what you need to know when participating in loan consolidation and repayment programs.
Grace Periods Do Not Reset
You normally have a grace period of up to six months after graduation to begin paying your loans. During this time, your loans do not accrue interest nor go into default for non-payment. When applying for loan consolidation, most lenders want you to wait until the grace period has ended.
If you decide to enroll in graduate school during that six-month stretch, you will only receive the remaining time on your grace period after graduating a second time. Therefore, you must carefully time your school attendance periods and loan consolidation application to avoid missing payments and ending up in default status.
Multiple Repayment Plans Available
After completing the loan consolidation process, you have the ability to select from eight structured repayment plans. The repayment plans range from fixed and graduated amounts to several income-based programs. You will need to look over your career goals and finances with a professional to determine the best repayment plan for your situation.
With the income based repayment plans, your loans, interest included, are forgiven in 20 to 25 years. If you work in a public service career, loan forgiveness occurs in just 10 years. During these income-based repayment periods, you will pay between 10 to 15 percent of your discretionary income to your loan balance.
Yearly Program Renewals Mandatory
You must keep careful track of your repayment program application date, as yearly renewals are required. If you fail to reapply on a yearly basis, the loan forgiveness counter may start off at the beginning. The yearly application process involves submission of your tax forms to prove a qualifying income status for your family size. Depending on your lender’s processing procedures, you will need to submit your tax forms by mail or through an online system.
Taxes Owed On Forgiven Balance
Once you reach the loan forgiveness date for your consolidated loans, you will need to claim the forgiven total as income on your taxes. If you plan ahead, and have the income available, you can build up a savings account with enough funds to cover the income tax payments. Otherwise, you may need to set up a payment plan with the IRS to cover taxes on the forgiven loan debt amount.
Weighing Loan Consolidation and Repayment Options
With so many program requirements, restrictions and options to consider, it is wise to involve a professional in the consolidation and repayment plan selection process. A professional can help you identify eligible loans and bundle them into the appropriate consolidation plan. Forgetting a single loan has the potential to reset your journey toward loan forgiveness, so you must ensure all debts are included the first time around.