College loan payment plan: Minimize interest, avoid default

It’s no secret that students who recently graduated from college are facing large student loan balances, which likely will take several years to pay off.

Graduates who have more than one student loan outstanding should establish good records of the various loans and establish a plan for repayment that minimizes the interest paid over the terms of the loans.

It is also important to avoid scams associate with student loan repayment. Cheryl Munk recently wrote a comprehensive article in the Wall Street Journal indicating many mistakes that students can make regarding repayment of student loans.

Some graduates will have a six-month grace period to find a job before repayments are required. For many, payments will begin in November. It is prudent to make a list of all loans and loan servicers. As Munk pointed out, the company that made the loan may not be the same company servicing the loan.

Preparing a document that identifies each servicer name, address, phone number and website, as well as the minimum amount of each loan payment and the due date, is essential.

Any borrowers who are not sure of their outstanding federal loans outstanding should visit nslds.ed.gov, click on “Financial Aid Review” and log in using their user name and password. When students initially applied for financial aid, the user name and password were established. For private loans, students can contact their loan company directly or contact the school's financial aid office for information.

In order to make sure that loan servicers provide students with up-to-date loan information, students must notify these providers with the latest address. It is normal for students to change addresses after graduation. Failing to keep servicers apprised of

the latest address may result in not receiving necessary information from the servicer.

If a student returns to school at least half time, he or she may be eligible for a deferment. Naturally, in this situation, the student should notify the servicer with appropriate documentation.

There are tools that can be used to reduce the interest paid. For example, with some servicers there is an interest rate incentive for enrolling in an automatic payment plan. Ask your servicer if such an incentive program is in effect.

Students who find that they can’t make a minimum payment for their private student loan for any reason should contact their loan servicer in advance. The servicer may be able to offer a temporary interestrate reduction or other options. It is important to work with the servicer in this situation in order to avoid a default in the case payments are missed.

For federal student loan options, if you are looking for options to reduce your required monthly payment, contact the Department of Education to determine your eligibility for income-driven repayments. If you are eligible, you can reduce your monthly payment, and after 20 or 25 years (depending on your degree), your outstanding balance can be cancelled. However, the cancelled amount will be considered taxable income.

Unfortunately, there are many repayment scams that should be avoided. Beware of any company that charges an upfront fee, promising lower debt or debt forgiveness. If you are called randomly by a party claiming to be associated with the government or a loan servicer, never provide confidential loan information.

You should always first consider options offered by your loan server for private loans, and by the Department of Education for federal loans.

It’s important to understand the different regulations between federal and private student loans. For example, the default regulations are different. With a federal loan, you are considered in default if a payment has not been made for 270 days. With a private loan, you could be in default after missing one payment.

You could also be in default if a cosigner dies. You should explore the possibility of obtaining a co-signer release with your private lender.

It is important for you take the necessary steps to avoid default. Being in default will destroy your credit rating, and limit your options in obtaining employment, getting approval for a mortgage and obtaining other credit.