Long-time reader Geoff asked the following question:

My wife finished her grad school a year ago and got a job as a teacher. This summer, she’s been taking college courses in order to boost up her pay. We just received an email from Sallie Mae (her student loan provider) that they have automatically put her loans into deferment until 2012 due to her
enrollment activity. I’m assuming that the colleges she’s taking courses from somehow communicate with Sallie Mae and that’s how they found out. Although she is taking 12 credits this summer, it’s only for the summer, and I know a deferment usually applies only if you continue to be in school. Will they automatically know that she is no longer in school in September, and will end the deferment? If not, do we have to notify them? And if we don’t would we be penalized?

The only question I can answer is that the deferment rule is you must be in school at least part-time, as defined by your school. Your school may define 12 credits as part-time, so you’re safe there.

As for automatically knowing, my lender, ACS, uses a central database that is supposed to be updated by the school with my student status. When I took a semester off, that database was updated to reflect that. Now, the loan is still in deferment but I graduated a couple months ago, so my question is the same as Geoff’s – will I be on the hook for the interest? Is it my responsibility to notify the lender? Or will they know later, when the school updates the database?

I tried asking ACS but gave up after thirty minutes on hold, does anyone know how we should be handling this?

Update: I emailed ACS two days ago with this question and here was their replay:

The school is a participant of the National Student Loan Clearinghouse (NSLC) they will report your enrollment status and graduation date to the NSLC, which in turn will forward this information to ACS.

Interest will start to accumulate once the account enters repayment status.

Student loans have been on my mind ever since I read about the latest legislation dropping Stafford rates earlier this month.

Here’s a brief recap of where my student loans are now. I consolidated my Stafford loans years ago, locking in a very comfortable rate of 3.25%, and the balance currently stands at a little over $22,000. The loan had been in deferment as I completed my MBA at Johns Hopkins, which has stopped the clock the last few years, but with my graduation the interest has started to accrue again. We earn too much to be eligible for the student loan interest tax deduction (certainly not a bad thing) and thus bear the full brunt of the 3.25% rate. Once again, I’m revisiting my student loan dilemma.

$22,000 in student loans at an effective tax rate of 3.25%. We also have a mortgage of around $220k at an effective tax rate of 4.3125% (the rate is 5.75% but it’s tax deductible, in the 25% tax bracket the effective rate is 4.3125%; we could consider only the deduction above the standard deduction for couples $10,900 but that begins to get overly complicated). Math says that if we were to pay down a debt, it would be my mortgage first because it’s at the higher tax rate. So I should never make more than the minimum payment on my student loan unless we have paid off the mortgage (which I envision is something that won’t happen for quite some time).

Proponents of Dave Ramsey’s Debt Snowball approach would say that you should pay off the student loan first because it’s the smaller amount (ahh, psychology). I personally don’t subscribe to that idea, I go by the Blueprint for Financial Prosperity Common Sense Payment Strategy (okay I just made that up, it’s how most people who understand interest rates and math would pay down their debt, I just added some color). While I anticipated this result, it’s always good to revisit things as situations change.

So, the student loan is here to stay for the foreseeable future.

My sister is a public school teacher in Boston. She’s participating in a program where her student loans will be paid off after some number of years teaching difficult students in schools in low-income neighborhoods. The arrangement works for my sister because she would be teaching anyway, though as a young female teacher the rowdy students seem like they would be a greater challenge for her, and now she’s also getting sizable debts forgiven. She hasn’t complained once yet, so perhaps things are well.

I don’t know the name of the program she’s participating in but there are several public service programs that offer the same benefits. If you’re in one of these fields, you’ll want research these more as you could get some of your loans forgiven. I don’t know if the pay for these jobs is adjusted accordingly though.

Public Service Loan Forgiveness Program

The Public Service Loan Forgiveness Program is the biggest of the loan forgiveness plans. It offers total loan forgiveness on Stafford, Grad PLUS and associated consolidation loans in the Direct Loan program if you work in a “qualified public service job” for at least 10 years and continue to make payments during that span. Ten years seems like an awfully long time. The standard payment structure on Stafford Loans is equal payments over ten years! However, typical consolidation repayment lengths are often thirty years and consolidation is always a good idea.

A qualified public service job is often determined by the employer, rather than the role you play. If your employer is a nonprofit, tax-exempt 501(c)(3) organization, you’re eligible. If it’s the federal, state, local, or tribal government, you’re eligible. Finally, if you’re in a full-time Americorp position, you’re eligible. If you don’t meet any of those, you can still qualify if your employer is a non-profit type entity that is engaged in public service but is not a political organization, religious organization, or a labor union. Rules are slated to be finalized by the Department of Education in November.

TEACH Grant

The TEACH (Teacher Education Assistance for College and Higher Education) Grant is a grant worth up to $4,000 a year if the student agrees to teach at least four years in the next eight in a “high-need” field in elementary or secondary school that serves low-income students. It’s a new program and you need to apply with your school’s financial aid office. If you’ve already graduated, unfortunately you can’t apply for this particular grant.

If you are out of school, thus ineligible for the TEACH Grant, consider asking your school district’s administration to see if they are covered under The National Defense Education Act. Under that Act, if you become a full-time teacher in an elementary or secondary school that serves students from low-income families, you can get some of your Perkins loans forgiven. It’s 15% of your loan for the first and second years, 20% for the third and fourth years, and 30% for the fifth. My sister may be in this program.

Volunteer Work

Those two programs have been getting most of the press lately but there are several other programs available. Here are some of the other options:

• AmeriCorps: Receive $7400 in stipends and $4725 towards your loans for 12 months of service.
• PeaceCorp: You can get deferment of your student loans and partial cancellation of Perkins Loans, 15% per year of service up to 70%.
• Volunteers in Service to America (VISTA): $4725 for 1700 hours of service.

In addition to the programs mentioned here, there are many more specific programs.

Additional resources:

• Public Service Loan Forgiveness [IBRinfo, nonprofit, nonpartisan Project on Student Debt]
• TEACH Grant Program [Federal Student Aid, office of the US Dept. of Education]
• Loan Forgiveness [FinAid.org]

Every year on July 1st, student loan interest rates are announced and with the recent rate drops there have been significant decreases for students if they opened their loans before July 1st, 2006. Before then, all loans were variable rate and loans that were originated then still carry the variable rates. That variable rate will decrease from 7.22% to 4.21%. If you had a loan after July 1st, 2006, sorry but yours was fixed and won’t change.

Student loan consolidation isn’t really a magical trick, you essentially take all of your student loans, figure out your effective aggregate interest rate, and consolidate it into one loan with one monthly payment. Before July 1st, 2006, Stafford Loans had variable interest rates so it would benefit you to consolidate (lock) your loans when the rates are low. I consolidated my Stafford Loans a few years ago at 3.25%, minus some direct debit and timely payment interest rate discounts. So, if you had all Stafford Loans and consolidated them, your rate would be 4.25% (rates are always rounded up to the next eighth of a percent) if you consolidated within your grace period. If you consolidate after that six month grace period, there’s an automatic 0.6% increase tacked on to make it 4.85%.

Finally, this is really just a PSA for folks who are getting new loans. The rate, starting today, falls from a fixed 6.8% to 6% on new Stafford Loans. Loans originated after July 1st, 2009 will be 5.6%, those after July 1st, 2010 will be 4.5% and those after July 1st, 2011 will be only 3.4%.

When I graduated college, I had around four or five student loans (a mix of Stafford and Perkins loans) with as many lenders and was sending off checks each month to all of them. It was a headache… so when I heard that I could consolidate (through the billions of junk mailings the consolidators sent me), I jumped at the opportunity. In analyzing a bunch of student loan consolidation lenders, I came to one conclusion: it’s all about the rate discounts.

For me, my loans were all government backed student loans with very specific interest rates. I don’t know if this is different for students with private loans (non-government backed loans like Stafford and Perkins) but when it comes to consolidating the government backed loans I had, they just averaged the rates and the dollar amounts and treated it as one big chunk.

So, if I had $10,000 at 3% and $10,000 at 4%, my consolidated loan was for $20,000 at 3.5%. Every lender I talked to gave me the same exact information, I was going to have a loan for $20,000 at 3.5%; there was absolutely no difference and no negotiating that. The difference was in the rate discounts and they came in three forms:

• rate discounts for auto-debit,
• rate discounts for on-time payments,
• rate discounts for consolidating within your grace period.

Auto-Debit Discount is usually a quarter of a percent off your interest rate (or something around that) if you set an auto-debit from your bank account. On-time payment history is another great interest rate reducer, also around a quarter of a percent, and that’s usually after a year or so of on-time payments. The lender is looking to collect money and reduce headaches, so they offer these discounts. Lastly, if you’re willing to consolidate within your grace period, you can expect something on the order of half of a percent discount.

There you go, that’s what I found when I looked into consolidating my student loans.

I receive the following email the other day and I am posting it to see if anyone else has some advice for a fellow reader with regards to his situation:

From: Dave

Subject: Tax Breaks for Student Loan

Hi Jim,



I’ve got a question on a difficult situation.



My girlfriend’s brother exited an Indiana university early with a 4.0 GPA several years ago, and when he wanted to go back he didn’t have the resources to get started. My girlfriend got a $3k student loan for him, as well as a laptop she put on her Discover card, with the idea that he would buy books and give her the rest back to immediately pay back Discover. Long story short, he never paid her back, ended up running away to the Southwest, and pawned her laptop. There’s not much that the authorities can do, since she applied for the loan and essentially gave him a gift on her credit card, but I was wondering if there was anything that she could redeem from the student loan on her taxes. All police reports have been filed at present.



Any help, as you could imagine, would be an enormous help. We have a mortgage to pay and would like to afford to have a child. I just want to see some of that back, if at all possible.

My response:

Thanks for the email and that’s unfortunate what’s happened between your girlfriend and her brother, but sometimes that’s life. In general, student loan interest is deductible if you make under $50,000 (after adjustments) and I would think that since she is a cosigner on a student loan, she could claim the deduction as long as she’s not a dependent on someone else’s claim (her parents?). If she just got a regular loan from the bank (not a student loan), and lent it to him, she may not have any options in terms of deductibility.

Anyone have any thoughts?

If you have a student loan and recently starting taking advantage of your employer’s education reimbursement program, you’ve probably heard the words deferment and forbearance thrown around quite frequently and you probably aren’t 100% sure what the difference is (unless you were a wordsmith/geek and knew what forbearance meant). Due to a mix up with Johns Hopkins, they reported me as less than part time and my deferment became a forbearance, which resulted in about $340 of interest that accrued during that period of forbearance (which led me to research the difference). While it’s not a thousands of dollars, I’m not paying $340 when I don’t have to (no one should).

Webster Dictionary Definitions:

• Forbearance – a refraining from the enforcement of something (as a debt, right, or obligation) that is due
• Deferment – the act of delaying or postponing

So, how does this affect you, a student loan holder? In both cases, you will no longer be required to make your regularly scheduled student payments. With a forbearance, the interest accrual process still continues, you simply aren’t required to make any additional payments. As interest accrues, you may decide to pay that off or not, that option is left up to you. Any unpaid interest that accrues and isn’t paid off within the period of forbearance is capitalized (made part of the principal). With a deferment, your loan is frozen in time – interest doesn’t accrue and you aren’t required to make any payments.

How do you get a deferment instead of a forbearance? Usually a student loan servicer will grant a deferment if you are enrolled in classes at least part-time, defined by the institution you’re currently attending. They do not have their own universal definition of part-time, they rely on the university or college to make that determination.

A forbearance is usually granted on request and with proof of some sort of reason. Your student loan servicer will have a forbearance process and you will simply have to follow that process, which will include an application.

Like most folks out there, I don’t like owing anyone money. I don’t like owing the bank money on my first mortgage, I didn’t like owing the bank money on my second mortgage, and I don’t like owing the lender money on my student loans. Here is my dilemma… back in September I wrote a relatively straightforward article titled “Don’t Save, Pay Off Debt!” in which I said that you should list the interest rates of your cash and of your debts in descending order. If you happen to have any cash in an account listed lower than a debt, you should pay off the debt with that cash unless it’s earmarked for a specific purpose (down payment, emergency fund).

Many of us who have student loans probably locked them in at rates way under the 5% you can get any online bank. Personally, I have about $24,000 in student loans at 3.25% (currently in deferral because I’m taking classes) which would put the debt underneath the cash I have in the 5%. Logic, and math, would indicate I should just pay the minimum payment on the student loans and keep the rest of it in my HSBC Direct account (even if you factor in that I have to pay taxes on the 5% interest). In fact, since my first home mortgage is at 5.75% (fixed) I should actually be paying that debt off first before I even consider paying the student loans because it’s at a higher interest rate. And on the first mortgage, I have exactly zero chance of paying off my mortgage (over $200k) anytime soon.

I want to pay off the student loan because it’s satisfying to write a debt off the “books” but I have to keep reminding myself it’s not the smart thing to do.