Grads Don’t Have to Borrow Trouble
The day of reckoning is nearly here for indebted college graduates.
Student loan payments begin six months after graduation. That’s next month for 2 million college grads.
In today’s tight job market, loan repayment time may spell trouble, said Bob Murray, spokesman for USA Funds, an Indianapolis loan guarantor. Many graduates still are looking for work--or may have lost their first jobs because of the economic downturn--making it difficult, or even impossible, to start repaying their loans.
“I am continually talking to people who are not yet employed or are underemployed,” said Brian Krueger, president of Collegegrad.com, a Web-based employment service for recent college graduates. “It’s also the first time in my memory that companies made offers and rescinded them. There were more of those this year than I’ve ever heard of--ever--and I’ve been in this business 20 years.”
Krueger is optimistic, however. His company just completed a survey of corporate hiring plans and found that 45% of the firms surveyed planned to increase the number of college graduates hired next year.
In the meantime, there is some relief for financially strapped graduates with federal education loans. The federal student loan program provides two types of help to borrowers who are suffering economic hardships: loan deferments or forbearance. Each can provide a graduate with some breathing room.
Here are some of the options and the kind of help they provide:
Question: What is a deferment?
Answer: It is a structured program that can temporarily halt the borrower’s need to make payments on student loans. However, interest will continue to accrue on unsubsidized student loans, so the student’s loan balance generally will rise during the deferment period. If the student has a subsidized student loan, the interest will not accrue during a deferral period.
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Q: Who can get this relief?
A: Borrowers who have returned to school at least half time, who are unemployed or who are suffering a severe economic hardship.
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Q: What’s a severe economic hardship?
A: In this case, there are three possible definitions:
* A borrower who is working full time but earning less than the federal minimum wage of $5.15 an hour, or less than a poverty-level income for a family of two.
* A borrower who is working full time but has total federal education loan payments that exceed 20% of the borrower’s monthly income.
* A borrower who is receiving federal or state public assistance payments, such as food stamps or Aid to Families with Dependent Children.
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Q: Is there a maximum amount of time for which loans can be deferred?
A: As long as the borrower is attending an institution of higher learning at least half time, the loan payments can be put off.
There are time limits on other types of loan deferrals, however. Students may receive a maximum of three years in economic hardship and unemployment deferrals over the life of the loan. That means that someone who gets a one-year deferral now due to economic hardship would be able to defer his or her loans for a maximum of two years in the future.
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Q: What about forbearance? What relief does that provide?
A: Forbearance can come in many forms. It can involve cutting a borrower’s interest rate, reducing the borrower’s payments or putting payments on a temporary hiatus.
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Q: Who qualifies for this?
A: Although the general standard is that the borrower must be experiencing some financial hardship that makes it impossible to repay loans on their initial terms, the qualification standards are not as rigid as they are for loan deferrals. Each lender or loan servicer decides to accept a forbearance application based on the facts and circumstances the borrower provides.
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Q: Is there a maximum amount of time a borrower can receive loan forbearance?
A: Each accepted forbearance application will provide the borrower with a maximum of one year of relief. If additional relief is required, the borrower must reapply.
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Q: How do you apply for a deferment or forbearance?
A: Lenders and loan servicers have standard applications that are usually available on the lender’s Web site or through the Department of Education. The borrower may need to provide evidence supporting their application.
For instance, those requesting an in-school deferral may need to submit enrollment verification information; those needing an economic hardship deferral or forbearance may be asked to provide financial information.
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Q: Do you have to make loan payments while waiting to hear whether a deferment or forbearance request has been accepted?
A: Yes. If you don’t, your loan goes into default, which can hurt your credit rating and make you ineligible for preferential interest rates that many lenders provide to student borrowers with good payment histories.
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Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns visit The Times’ Web site at www.latimes.com/perfin.
