Student Loan Exit Counseling: A CliffsNotes Version

Jul 26, 2016
Student Loan Exit Counseling: A CliffsNotes Version

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Online student loan exit counseling, which is required for all federal loan borrowers, might only take about 25 minutes to complete, but understanding all that information is a different story. To save you time — and to keep you from pulling your hair out — we highlight the most important points from each section.

We’ll talk you through loan terminology, repayment plans and more. After all, understanding your loans is the first step to paying off your student loans as quickly as possible..

Here’s a breakdown of the key points from each section:

Section 1: Understand your loans

The bare minimum you should know about your student loans is how much you borrowed and how much those loans are actually going to cost you. If you’re not sure how much you owe or what your interest rates are, you can either log in to your exit counseling session, your loan servicer’s website or the National Student Loan Data System to find out.

From there, familiarize yourself with some basic student loan terms:

  • Principal balance: The amount you borrowed that still needs to be repaid.

  • Grace period: A time during which you’re not required to make any payments. It’s usually six months and starts after you leave school.

  • Accrued interest: The amount that adds up on top of your principal balance during periods where you’re not required to make payments. It also accrues daily while you repay your loans, as long as you have an outstanding balance.

  • Capitalization: When the accrued interest is added to your principal balance.

  • Servicer: The company you’ll make your payments to.

When will your loans be paid off?

Section 2: Plan to repay

All federal student loan borrowers are automatically put on the standard 10-year repayment plan unless you choose a different option during exit counseling. But there are other options if you’re struggling to make payments, such as income-driven repayment plans. These plans relieve borrowers by capping payments at a percentage of your income, and after 20 to 25 years, any remaining balance is forgiven.

The catch? You have to reapply every year to stay on it, and you’ll be taxed on the forgiven amount.

You can apply to get on an IDR plan online, but be sure to contact your student loan servicer to go over all of your options first. If you have a Perkins loan, you’ll have to consolidate it into your direct loans in order for it to be eligible for an IDR plan. However, that would cause you to lose forgiveness benefits on that loan. For more information on your Perkins loan, contact your school’s financial aid office.

Section 3: Avoid default

Your loan goes into default if you stop paying for 270 days. If that happens, your loan may go into collections, your wages could be garnished and your credit score will take a hit.

When it comes to federal loans, you have several options for avoiding default when you’re struggling to make your minimum payment. You can:

  • Change your repayment plan. Your payments could be as low as $0 per month on an IDR plan.

  • Get a deferment. You won’t have to make payments during this time, and if you qualify for economic hardship, it can last up to three years.

  • Go into forbearance. That lets you stop making payments for up to 12 months at a time.

Interest will continue to accrue during both deferment and forbearance — with the exception of subsidized and Perkins loans, which don’t accrue interest during deferment — and will be capitalized when you start making your regular monthly payments again. That will end up costing you more in the long run, so it’s best to only use deferment and forbearance as a last resort.

Section 4: Make finances a priority

To keep yourself on track with payments and to avoid something as unpleasant as going into default, try following a budget.

Here are a couple of more general guidelines to keep your bank account from flatlining:

  • Establish an emergency fund that covers three to six months of necessary expenses, like rent, utilities and food.

  • Avoid revolving debt, like carrying a balance on your credit card, to avoid paying more in interest. The longer you take to pay it off, the more it’ll cost you on top of your original debt.

Section 5: Repayment information

You can find out what your monthly payments will be by logging in to the Federal Student Aid repayment estimator. If you’d like to lower your monthly payments, find out if you qualify for another plan, like the income-driven repayment plans mentioned in Section 2, by talking to your servicer about your options.

Devon Delfino is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @devondelfino.

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