Loans Loan Repayment 3 — Questions and Answers
Question 1: What is loan deferment?
- A permanent reduction in your interest rate
- A temporary postponement of loan payments, often without penalty (Correct answer)
- Cancellation of a portion of the loan balance
- A lender's right to accelerate the loan
Correct answer: A temporary postponement of loan payments, often without penalty
Deferment allows borrowers to temporarily pause payments, typically for reasons like school enrollment or unemployment, without defaulting.
Question 2: How does loan forbearance differ from deferment?
- Forbearance cancels interest; deferment does not
- Deferment is only for student loans; forbearance applies to mortgages
- In forbearance, interest typically continues to accrue even on subsidized loans (Correct answer)
- There is no practical difference between the two
Correct answer: In forbearance, interest typically continues to accrue even on subsidized loans
Unlike deferment on subsidized loans where interest may be covered, forbearance generally results in interest accruing and capitalizing.
Question 3: What does it mean when a loan goes into default?
- The borrower has made all required payments
- The borrower has failed to make payments for a specified period, triggering collection actions (Correct answer)
- The lender has forgiven the remaining balance
- The interest rate has been permanently increased
Correct answer: The borrower has failed to make payments for a specified period, triggering collection actions
Default occurs after a defined period of non-payment (e.g., 270 days for federal student loans) and triggers serious consequences including collections.
Question 4: Which federal student loan repayment plan caps monthly payments at a percentage of discretionary income?
- Standard Repayment Plan
- Graduated Repayment Plan
- Income-Driven Repayment (IDR) Plan (Correct answer)
- Extended Repayment Plan
Correct answer: Income-Driven Repayment (IDR) Plan
Income-Driven Repayment plans tie monthly payments to a percentage (typically 5-20%) of the borrower's discretionary income.
Question 5: If a borrower is delinquent on a mortgage, which option allows them to sell the home for less than what is owed and have the lender accept it as full settlement?
- Loan modification
- Short sale (Correct answer)
- Deed in lieu of foreclosure
- Cash-out refinance
Correct answer: Short sale
A short sale lets the homeowner sell the property for less than the outstanding balance, with lender approval, to avoid foreclosure.
Question 6: What is the grace period on most federal student loans after graduation?
- 30 days
- 90 days
- 6 months (Correct answer)
- 1 year
Correct answer: 6 months
Federal Direct Loans typically offer a 6-month grace period after graduation before the first payment is required.
Question 7: A borrower who refinances their loan to a lower interest rate but extends the term may end up:
- Always saving money overall
- Paying more total interest despite the lower rate (Correct answer)
- Eliminating their prepayment penalty
- Automatically enrolling in an IDR plan
Correct answer: Paying more total interest despite the lower rate
A longer repayment term means more payment periods for interest to accrue, which can outweigh the benefit of a lower rate.
