Whether or not you know the status of the loans you have, the lenders and the terms of repayment, one thing is certain: You owe the money, the debt will not go away, the lender will find you and the consequences for non-payment will be severe.
The good news is you can escape from student debt prison. But first you have to learn everything about the confusing world of student loans.
Know Your Student Loan
Federal student loans. These loans are guaranteed by the federal government. That means the government will reimburse your lender if you default. But don't think of default as an easy way out. If you default the government will come after you aggressively and will show no mercy. There are currently 15 different federal student loan programs and the plans are always changing. The most common are Stafford Loans and Perkins Loans.
Private student loans. These are loans made by banks and other financial institutions without government backing. If you default on a private loan, expect to hear from an aggressive guarantee agent.
Interest. Interest is the commission or "rent" you agreed to pay on the money you borrow. If you have a loan with an interest rate of say 8 percent, each year the holder of your loan adds 8 percent of your outstanding balance (principal) to the total amount you owe. If you are not paying at least the interest each month, your balance is getting larger. There is no limit to how big it can get. The method of adding interest can be confusing. If your loan says interest will be compounded daily, your loan holder will add 1/365 of 8 percent to the balance of your loan each day. If compounded monthly, the holder will add 1/12 of 8 percent at the start of every month. Interest that builds up over time is called accrued interest. All loans begin accruing interest the moment the loan is funded. Who pays that interest is the critical issue.
Subsidized. If your loan is subsidized, the government pays the interest while you are in school and during times of deferment. It is not simple to get a subsidized loan because these are need-based. Private loans are never subsidized by the government.
Unsubsidized. If your loan is unsubsidized, you must pay interest from the moment the loan is funded. But since the lender doesn't require you to make payments while you are in school more than half-time, every month the interest is tacked onto the loan balance. The interest is capitalized. Even though you are not borrowing more money, the balance is growing because of the interest. Unsubsidized loans are not need-based.
Source: Crosswalk
Mary Hunt | Debt-Proof Living
