Tuesday, April 5, 2011

Avoiding Student Loan Default

Are you facing default on your student loans because you can’t stretch you paycheck far enough each month? If you have exhausted your deferments, don’t panic! Instead, apply for a government student loan consolidation. 

There are a lot of benefits to a government student loan consolidation. Basically it allows you to forget about sending multiple checks to multiple lenders each month. Instead, you write just one check, to the Department of Education. The size of the new check will be less than the sum of the old ones, even though it may stretch out your total repayment term. The interest rate you pay will be the weighted average of the loans under consolidation, and the rate will be capped at eight and a quarter percent.

The interest rate and monthly payments are fixed, even if some of your previous student loans were variable rate. This alone is a great benefit, because you can budget precisely how much will be spent each month on repayment through government student loan consolidation. 

There are several repayment plans from which to choose. Two are income-based: the Income-Based Repayment Plan (IBR) and the Income Contingent Repayment Plan. The IBR Plan is tailored for those undergoing some financial hardship, and is based upon your annual income. It is targeted for students who will be working at jobs that don’t pay a lot, like a starting public health nurse or school teacher. It works by capping monthly payments at a percentage of discretionary income. 

When figuring your discretionary income for IBR, note that if you are married and file separately, your spouse’s income will not be included in the calculation. After paying out your IBR loan for 25 years, the remainder will be forgiven (although you may have to pay taxes on the forgiven amount).

The Income Contingent Repayment (ICR) Plan is another way to benefit from government student loan consolidation. Your monthly payment will be a function of your annual income, the size of your family, and the amount of the loan. As with the IBR, any balance remaining after 25 years is automatically forgiven. 

Every year, your ICR payment will be recalculated based upon your adjusted gross income and the balance left on the student loan. To be eligible for IBR or ICR, you must give the Department of Education permission to look at your income tax returns filed with the Internal Revenue Service.
 
© 2011 Hedge Fund Writer LLC

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