6 tips to manage student-loan debt
Deferment, consolidation are among the options
Finding a job in a slowgrowing economy is daunting enough without new financial obligations.
Yet that’s the challenge many university students graduating over the next few weeks will face before too long. The clock on their student loans will begin counting down to their first payment due date.
Both federal and private student loans give borrowers a six-month grace period before they’re required to begin making payments. Grads also have options to defer payments in certain situations, or even have their balance reduced if they qualify.
A study released in January by credit-reporting agency TransUnion found that the average student-loan debt rose 30 percent between 2007 and last year to $23,829.
Here are six tips on how new grads can manage their student-loan debt:
1. Understand your loans.
It’s essential to know the terms of your loan in order to evaluate your options for repayment or to request a deferment when your grace period expires. For example, Stafford loans have a sixmonth grace period, while Perkins loans give you nine months before your first payment is due. Grace periods for other types of federal loans and private student loans can vary.
Ask your lender or check out nslds.ed.gov, which shows loan details on federal loans.
“Whether you owe a little or a lot, it’s crucial to know how much you owe, to whom and what your repayment options are,” says Lauren Asher, president of the Institute for College Access & Success, a non-profit advocacy and research organization.
2. Know your payment options.
Federal loans are set up to be paid back over a 10-year period. But there are other options if you can’t afford your monthly payments under that standard plan. You can extend the length of time to pay back the loan beyond 10 years, which will lower the monthly payment, but you will pay more over the life of the loan. Some may qualify for plans that peg the monthly payment to a certain percentage of their annual income. And if they’re on such a plan for 25 years, anything they still owe will be forgiven.
The Project on Student Debt, which is managed by Asher’s organization, has more information on income-based repayment plans on this site: Ibrinfo .org.
On private student loans, repayment options will vary from one lender to the next.
3. Consider deferments and forbearance.
Can’t find a job? Can’t afford any student-loan payments? If you have federal student loans, you can temporarily postpone your payments by asking for a deferment or forbearance.
In the case of a deferment, you’re allowed to temporarily put off making payments on your loans. During this period, interest does not build up on three types of federal loans: direct subsidized loans, subsidized federal Stafford loans and Federal Perkins loans.
On other types of federal loans, your payments will be put on hold, but the balance of your loan will continue to rack up interest.
Several factors may qualify you for a deferment once you’re done with school, including economic hardship, unemployment or serving in the military on active duty during a war.
If you don’t qualify for a deferment, you may request a forbearance, which can generally buy you up to 12 months without making payments. However, you’ll continue to pile up interest on your balance, even with subsidized loans. For more details on how these options work, go to studentaid.ed .gov.
4. Avoid racking up missed payments.
Missing payments on your federal student loans can seriously hamper your ability to get credit.
In the case of federal student loans, you will be declared to be in default if you miss nine payments in a row. At that point, the government will ask you to pay back your entire loan balance immediately and will resort to garnishing your wages or taking it out of your income tax refunds. The default threshold is generally crossed far sooner with private student loans.
Experts recommend contacting your lender as soon as payments become a problem to discuss options.
Keep in mind, unloading your student-loan debt via bankruptcy is very difficult, though not impossible. You’ll need to persuade the court that what you owe on your loan will result in an undue hardship on you and your dependents. Of course, even if you succeed, filing for bankruptcy has steep and long-standing consequences on your ability to get credit.
For more details on this option, see the National Consumer Law Center’s website on student loans: www.student loanborrowerassistance .org/bankruptcy.
5. Go beyond minimum payments.
One way to lower the total cost of your loan is to pay a little extra every month or even make an extra payment every few months. That will help bring down the principal.
6. Weigh a loan consolidation.
Consolidating several of your student loans can help you manage your debt because you need to keep track of only a single monthly payment. You can also extend the repayment period.
However, if your federal loan predates July 1, 2006, it’s likely it has a variable interest rate, which means you can probably get that rate lowered now. Consolidating loans issued after that date may not save you as much money on interest payments, however.
Keep in mind that if you take out a private student loan to consolidate federal loans, you will lose access to the borrower protections built into those loans, such as unemployment deferments.