Our son has a lot of student loan debt. He will be starting a one-year internship program soon and the loans will be in a deferment for the duration of the internship. We are concerned about the growth in his student loan debt. We would like to help our son pay off some of his student loan debt, starting with the oldest debt first. However, we are not cosigners on his loans and do not want to become responsible for all of his debt. What is the correct way for us to pay off some of his debt? How do we know for sure that our payments get applied to the loan?
Although the words “deferment” and “forbearance” are often used interchangeably, there is an important difference. Both involve a temporary suspension of the obligation to repay a debt. Interest continues to accrue during a deferment or forbearance. During a deferment, the federal government pays the interest on subsidized federal student loans, such as the Perkins Loan and Direct Subsidized Loan. The borrower remains responsible for the interest on Direct Unsubsidized Loans and Grad PLUS Loans. During a forbearance, the borrower remains responsible for the interest that accrues on all federal student loans, both subsidized and unsubsidized.
The interest will be capitalized if the interest is not paid as it accrues. Interest capitalization adds the interest to the loan balance, increasing the size of the loan. Interest on federal direct student loans is capitalized once, at the end of the deferment/forbearance period. Interest on other loans, such as private student loans, may be capitalized more frequently.
Some borrowers may wish to ask the lender/servicer for a partial forbearance instead of a full forbearance. During a partial forbearance, the borrower is responsible for making monthly interest-only payments. A partial forbearance prevents the loan from growing larger due to capitalized interest.
After a borrower has applied for a deferment or forbearance, the borrower should continue making payments on the loan(s) until he or she receives written confirmation that the deferment/forbearance has been approved. Otherwise, the loans could go into default when the borrower stops making payments on the loans. Federal student loans go into default after 360 days of non-payment. Private student loans go into default after 120 days of non-payment.
Nothing prevents parents from helping their children with their student loan payments. Doing so will not obligate the parents to continue making the student loan payments. Only the borrower and cosigner who signed the loan’s promissory note are responsible for the debt.
Note that if a person who is not obligated to repay a student loan makes a payment on the debt, that person is not eligible to claim the student loan interest deduction. Instead, the borrower can claim the student loan interest deduction as though he or she made the loan payment.
Although there are no prepayment penalties on federal and private student loans, payments on a loan in forbearance or deferment are applied first to the accrued but unpaid interest before the rest of the payment is applied to the principal balance.
To ensure that the parent’s payment is properly credited to the borrower’s loans, write the loan id numbers on the check. Also, include a cover letter which specifies the name of the borrower, the loan id numbers and other information to clearly identify the loan(s). When there is more than one loan, the parent may wish to specify that the extra payment be applied to a specific loan or that it be applied to all loans in proportion to the loan balances. It is usually best to have any extra payments applied to the loan with the highest interest rate, not the oldest loan or the loan with the lowest balance outstanding.
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