Federal Student Loan Repayment Tips for Recent Grads (Part Two)

If you recently graduated or left college, you may need to begin repaying your federal student loans soon. Here are a few tips that may help.

gConsider consolidating your loans.

You can consolidate most federal loans into one Direct Consolidation Loan, but be sure to carefully consider the pros and cons before you do.

Loan consolidation will generally lower your monthly payment by lengthening your repayment period, but you will pay more interest over time as a result.

If all of your student loans are not presented on one bill, consolidating them into one loan can simplify things by reducing your loan payments to one per month.

If you have federal loans other than Direct Loans, combining them in a Direct Consolidation Loan may make you eligible for additional repayment plans.

If you are seeking public service loan forgiveness, only Direct Loans can be forgiven so consolidating your other federal loans into a Direct Consolidation Loan will make them eligible to be forgiven.

You may lose some of the benefits associated with you original loans if you consolidate them. For example, if you consolidate a Perkins Loan, you give up the potential for the loan to be cancelled. (All or part of your original Perkins Loan may be cancelled if you are a full-time firefighter, VISTA or PeaceCorps volunteer, nurse, medical technician, or work in certain other public service occupations.)

Automating your payments can reduce your interest rate. 

You will receive a .25% reduction in the interest rates on your Direct Loans if you have the payments on those loans automatically debited from your bank account. Plus, automating your payments lessens the chance of you missing a payment.

If you cannot make a payment, work it out with your loan servicer. 

Your loan servicer may be able to offer you a deferment or a forbearance that temporarily stops or reduces your payments. Or you may be able to switch to a repayment plan with a lower payment.

If you do nothing, your loan may eventually go into default and the consequences of defaulting can be significant.

Claim a tax deduction for interest that you pay. 

You may be able to deduct up to $2,500 of the interest that you pay each year on your qualified student loans as long as your modified adjusted gross income (MAGI) is within certain limits, no one else claims an exemption for you on their tax return, and your tax filing status is something other than married filing separately.

The deduction is limited to taxpayers with a MAGI under $80,000 (single) or $160,000 (married filing jointly). If your MAGI is between $65,000 and $80,000 (single) or $130,000 and $160,000 (married filing jointly), the deduction amount will be reduced.

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