Volume 2, Number 4, September 2004
MONEY Matters

Preventing premature loan repayment

Starting a research fellowship or internship? Check your loan status to avoid a deferral debacle.

Industrial and organizational psychology graduate student Hannah-Hanh Nguyen leapt at a one-of-a-kind opportunity in 2002—an extramural fellowship in Vietnam to study differences between work behaviors in collectivistic and individualistic cultures. To conduct her independent research, Nguyen took an eight-month leave of absence from her graduate program at Michigan State University.

In the flurry of preparation, the fellowship administrators reminded her to check on her student loans, but Nguyen forgot—until she received a letter in Vietnam saying that her loans were going into repayment because she was no longer on Michigan State's rolls.

From halfway around the world, Nguyen scrambled to work out a deferral with her loan providers. Eventually, the paperwork went through, but she ended up making a few months of payments until the situation was straightened out—creating a financial squeeze on her personal budget.

To avoid such difficulties, graduate students expecting a change in their enrollment status—whether they are going on internship, starting a postdoc or, like Nguyen, taking time off for independent research—should talk with their school's financial aid office and student-loan providers before starting, says Judy Cramer, assistant director of financial aid at Virginia Commonwealth University and chair of the National Association of Financial Aid Administrators' Committee on Graduate and Professional Issues.

Following their advice, knowing the rules and simply opening your mail can make all the difference.

DEFERMENT 101

Federal law tightly regulates the student-loan business, so the rules are virtually the same, no matter who your lenders are.

Under the system laid out in the Higher Education Act and U.S. Department of Education regulations, universities report the names of students enrolled at least half time to a databank six times a year. Lenders automatically defer the loans of individuals on that list—what's called an in-school deferment.

Some students can take classes while on an internship or fellowship, which may automatically keep their loans in deferment. Borrowers in that situation should double-check with their financial aid office to make sure they meet the criteria for a part-time student, says Cramer.

However, the demands of a full-time internship or fellowship often prevent borrowers from enrolling part time. And some positions—such as Nguyen's fellowship—specifically prohibit coursework. When borrowers in that situation drop off their universities' rolls, the law requires that they begin repaying their lenders after a grace period of six to nine months.

But students can put off repayment by applying for a graduate fellowship deferment. To be eligible, borrowers must prove that the position is full time for at least six months and their loans are not in default. They also must apply for the deferment with each of their lenders.

FILING FOR DEFERMENT

How can you avoid hiccups in the deferment process? Financial aid advisers offer these tips:

• Read your mail. It may seem obvious, says Cramer, but it's the simplest thing you can do to stay on top of your loans.
• Talk to your financial aid office. Students can get helpful deferment information from the counseling services and workshops that many financial aid offices offer, says Cramer.
• Notify your lenders ASAP. "Contact your loan servicer as soon as you know this is a course of action you are going to undertake," says Martha Holler, a spokesperson for student-loan provider Sallie Mae. "Get the information compiled and in their hands." And remember to change your mailing address if you are moving, she adds.
• Pony up the proof. You will need to provide documentation of your fellowship or internship, such as a written statement about your fellowship and reports, projects or other evidence of your progress, says Holler.
• Don't assume deferment. Just because you dropped the application in the mail doesn't mean your loans are deferred, says Holler. Stay on top of things until you have the deferment in writing. Otherwise, she cautions, failure to make payments will damage your credit, and—if let go long enough—can have such grave consequences as garnished wages.

"But all that can be avoided with good communication and interaction with your student-loan provider," Holler adds. "We try to make the program as flexible as possible because every party that's involved—whether it's the lender or the guarantee agency that insures the loan or the Department of Education—wants the borrower to be successful in his first experience."

—DEBORAH SMITH BAILEY
gradPSYCH staff

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