Understanding the repayment process for student loans can go a long way toward building a solid financial foundation.
Remember, federal student loans are real loans, just like car loans or mortgages. Student borrowers must repay a student loan even if financial circumstances become difficult. Student loans cannot be canceled because a person didn’t get the education or job expected, or because a degree wasn’t earned (unless it wasn’t possible to complete a degree because the school closed).
At LHU we process two major types of loans: Federal Direct Student Loans and Federal Perkins Loans.
Federal Direct Student Loan Repayment
Exit Counseling for Federal Direct Student Loans
The Financial Aid Office contacts all students who received Federal Direct Student loans at LHU by letter upon graduation, withdrawing or dropping below half-time. The letter advises the student to complete the Exit Counseling requirement with the Department of Education at https://studentloans.gov/myDirectLoan/index.action.
All student borrowers of Direct Loans are required to complete exit counseling upon graduation and/or dropping below half-time status. Exit counseling covers all subjects that were covered in the entrance counseling, with an emphasis on repayment strategies.
Not only can a student borrower complete exit counseling on this site, but he can use the “Repayment Estimator” to calculate what his loan payments will be.
When a student graduates, drops below half time, or withdraws from an academic program, he will receive a six-month grace period for the Federal Direct Subsidized and Unsubsidized Loans. The grace period begins the day after the student has stopped attending school on at least a half-time basis. Once the grace period ends, loan repayment begins.
Student borrowers should make sure to notify the loan servicer when they are no longer enrolled. Students who fail to make required loan payments will possibly lose repayment incentives received or even go into default.
Choosing a Repayment Plan
Student borrowers have the choice of several repayment plans, and the loan servicer will send notification of the date the first payment is due. If a specific repayment plan is not elected, a standard repayment plan will be automatically selected. Most Direct Loan borrowers choose to stay with the standard repayment plan, but there are other options for borrowers who may need more time to repay or who need to make lower payments at the beginning of the repayment period.
Student borrowers, who have multiple federal education loans, can consolidate their loans into a single Direct Consolidation Loan. This may simplify repayment for those who are currently making separate loan payments to different loan holders. There may be tradeoffs, so student borrowers are urged to review the advantages and possible disadvantages of consolidation before consolidation is chosen.
While in Repayment
Upon receipt of the first bill, the student borrower will learn how to sign up for the electronic debit account (EDA) option and have the bank automatically make the monthly loan payments from a personal checking or savings account. With EDA a person doesn’t have to write checks, use stamps, or worry if payment will arrive by the due date. In addition, persons with EDA receive a 0.25% reduction in the interest rate on their loans during any period when the payments are made through EDA.
Persons having trouble making loan payments should contact the loan servicer as soon as possible. Their staff will work to determine the best option available. Options include:
- Changing repayment plans.
- Deferment, if certain requirements are met. A deferment allows a borrower to temporarily stop making payments on the loan.
- Forbearance, if deferment eligibility requirements are not met but the person is temporarily unable to make loan payments. Forbearance temporarily stops payments on the loan, temporarily make smaller payments, or extend the time for making payments.
- Forgiveness, under certain circumstances, the federal government will cancel all or part of an educational loan. More information can be found online at https://studentaid.ed.gov/repay-loans/forgiveness-cancellation
- If a borrower stops making payments and doesn’t get a deferment or forbearance, the loan could go into default, which has serious consequences—see below.
An unpaid loan first becomes "delinquent" if the monthly payment is not received by the due date. If a person fails to make a payment, they'll receive a reminder that the payment is late. If the account remains delinquent, they'll receive warning notices reminding of the consequences of default and of the obligation to repay the loans.
Upon becoming delinquent on loan payments, borrowers are urged to contact the loan servicer immediately to find out how to bring the account current. Late fees may be added, and the delinquency will be reported to one or more national consumer reporting agencies (credit bureaus), but this is much better than remaining delinquent on payments and going into default.
If a student borrower defaults on a Direct Student Loan:
- The Loan Servicer will require immediate repayment of the entire unpaid amount of the loan.
- The Loan Servicer may sue the borrower, take all or part of the federal and state tax refunds and other federal or state payments, and/or garnish wages.
- The Loan Servicer will require a borrower to pay reasonable collection fees and costs, plus court costs and attorney fees.
- A borrower may be denied a professional license.
- A borrower will lose eligibility for other federal student aid and assistance under most federal benefit programs.
- A borrower will lose eligibility for loan deferments.
- The Loan Servicer will report the default to national consumer reporting agencies (credit bureaus).
Federal Perkins Loan Repayment
Both the exit counseling and repayment processes for the Perkins Loan Program are somewhat different than the Federal Direct Student Loans.
Perkins exit counseling and repayment are completely handled by ECSI, a company that provides this service for LHU.
Upon notification that the student has graduated or dropped to less than half-time, ECSI will contact the student borrower by email as notification to complete the exit counseling requirement. Students who have misplaced the email, can access this information online at https://borrower.ecsi.net/ or by phone at 888-549-3274.
Perkins Borrowers will be required to make their loan payment directly to ECSI. If a person is having difficulty making a Perkins Loan payment, he should contact ECSI as soon as possible to discuss options.
There are several reasons a Perkins Loan could be deferred. Some examples are college enrollment, unemployment, and Military Service. Questions about deferment should be directed to ECSI.
The following Federal Perkins Loan Program cancellations apply to individuals who perform certain types of public service or are employed in certain occupations.
For each complete year of service, a percentage of the loan may be canceled. The total percentage of the loan that can be canceled depends on the type of service performed. Depending on the type of loan borrowed, and when that loan was taken out, a borrower may be eligible to cancel part of or the entire loan if they served as one of the following:
- Volunteer in the Peace Corps or ACTION program (including VISTA)
- Member of the U.S. armed forces (serving in area of hostilities)
- Nurse or medical technician
- Law enforcement or corrections officer
- Head Start worker
- Child or family services worker
- Professional provider of early intervention services
There is no standard application form for Perkins Loan cancellations. Contact ECSI to explore any of the above circumstances.
Perkins borrowers, who have both Perkins Loans and Direct Student Loans, can consolidate their loans into a single Direct Consolidation Loan. This may simplify repayment for those who are currently making separate loan payments to different loan holders. There may be tradeoffs, so student borrowers are urged to review the advantages and possible disadvantages of consolidation before consolidation is chosen.
Borrowers should carefully weigh the advantages and disadvantages of including a Perkins Loan in a consolidation loan. While the borrowers gain the benefits of the Direct Consolidation Loan Program, they also lose the benefits associated with the Perkins Loan Program.
We recommend that following points be considered prior to making a decision:
- Borrowers may qualify for cancellation of some or all of their Perkins Loans in exchange performing certain kinds of public service. These cancellation benefits are lost when a Perkins Loan is included in a Direct Consolidation Loan.
- Perkins Loans have a grace period of 6-9 months. When a Perkins loan is consolidated, any remaining grace period is lost.
- Interest does not accrue when a Perkins Loan is placed in deferment. However, a Perkins Loan is included in the unsubsidized portion of a Direct Consolidation Loan, and borrowers are responsible for interest that accrues on the unsubsidized portion of a Direct Consolidation Loan during deferment periods.
- Perkins Loans generally have a lower interest rate but have a less flexible repayment period of 10 years.
The consequences of default are severe and can be long term.
Serious action may be taken to recover the money, including notifying national credit bureaus of the default. This affects credit rating for a long time. In addition, the loan may be turned over to the federal government for collection. The Internal Revenue Service can withhold a U.S. individual income tax refund and apply it to the amount owed. An employer might be asked to deduct payments from a paycheck. In addition, a borrower may have to pay for expenses that resulted from the collections process. If a Perkins Loan is in default and the student returns to school, that student is not entitled to receive additional federal student aid. Legal action may also be taken.