What happens if you don't pay

Before we get into the various loan repayment options, let's take some time to dispel some of the clever schemes we know you're plotting for getting out of your expensive situation:

  • Moving. Just because you move doesn't mean that the loan people won't find you. We're not going to get into their clandestine and evil tactics; just realize that not only can you not hide, but that you shouldn't even try. Changing your name doesn't work either.

  • Ignoring your monthly loan repayment bill. Even if you got into a nasty fight on
    the phone with your lender's customer representative and have decided to teach him a lesson on manners by refusing payment, you'll soon discover that it's in your best interest to drop your grudge. Here's a scenario of what happens if you choose to completely disregard your student loans:

  1. The first monthly bill arrives in your mailbox. You put it on your desk and forget to pay.

  2. A second notice arrives in your mailbox. It accuses you of being a delinquent. (You achieve delinquent status the day after your monthly repayment is due and it's not in the lender's hands.) You scratch your head, add that notice to the growing pile on your desk, and turn your attention to the Victoria's Secret catalog that accompanied the notice.

  3. Two weeks later, you'll start getting phone calls and more notices. You lender is required to make at least four phone calls and send four of those letters before sending a final demand letter (about 5 months after the loan payment was due). This letter will tell you that unless you pay up now, a default claim will be filed on your loan.

  4. After a default claim is filed, your lender will turn your case over to a guaranty agency and you'll get a nasty phone call from them. If you don't negotiate some sort of deal within 60 days, your guaranty agency will report you to the national credit bureaus.

  5. Now the fabulous life you dreamed of leading starts to crumble around you. You'll be ineligible to receive credit cards, an apartment, or a mortgage for a car or house. The government has the right to deduct money straight from your income, and it's unlikely that you'll ever date again. We'll tell you how to survive a default later, but it's still not a pleasant way to live a life.

Options for paying

Here's the general deal on loan repayment: After graduation, you'll get 6 months of freedom from loan repayment. If you're smart, you'll use these 6 months to get a job. When loan repayment begins, you'll pay at least $50 a month (unless you're in forbearance, deferment, or your lender agrees to a smaller amount) until your entire loan (plus interest) is paid off. In any given month, you can opt to pay off more than your monthly requirement without penalty. You have to pay off your loan even if you aren't satisfied with the education you received and can't do jack squat with it. So you went to med school and ended up starting an Internet company? Tough cookies - you still gotta pay.

Here are your four main payment options. Keep in mind that you can switch from one to another, depending on your financial status:

  • Option 1: Standard Payment. If you land a good job out of college and can afford to make steep monthly payments, go with the standard payment schedule. Under the standard payment, you'll have finished paying off your debt within 10 years, and you'll have the best interest rate. This is the quickest way to pay off your loans, but it also requires the highest monthly payments.

  • Option 2: Graduated Payment. This is the payment method for people who get out of college expecting to make a modest but steadily increasing wage. The payment requirements will start off gentle, then increase every couple of years for the next 10 to 30 years.

  • Option 3: Income-Based Payment. If you're in a commission-based or seasonal business (say, selling houses or selling ice cream from a truck), your income probably vacillates. So your monthly payment bill will be proportional to the amount you are currently making and you'll get up to 15 years to pay it all off. The good news is that you will always be able to pay your loans. The bad news is that if you have a particularly good month, you never get the chance to enjoy it.

  • Option 4: Long-Term Payment. With this schedule, you'll be allowed to pay the least possible amount per month for 10 to 30 years. If you're a procrastinator by nature and this schedule sounds like it's your cup of tea, here's the catch: by the time thirty years is up, you may have paid double the original amount of your loan. This payment plan has by far the worst interest rate.

If you need to hear some numbers before making a decision on a payment schedule, contact your lender. (If you don't know who your lender is, contact your school's financial aid office.) Talk to a customer rep and ask them all the questions you want.