Attention recent college graduates, your six-month grace period will end soon. If you donned a cap and gown in May, expect student federal loan bills in your mailbox in late October or November.
The average student is graduating with almost $27,000 in debt. Federal student loan debt has passed the $1 trillion mark, and there are more than 7 million borrowers in default on their federal or private loans, according to the Consumer Financial Protection Bureau.
Your new monthly payments may feel more horrifying than cramming for finals ever did. If you’re a Stafford loan borrower, there are options to help ensure you don’t default, which will destroy your credit score, may cause the government to garnishee your wages or Social Security benefits and make you ineligible for future financial aid.
“The worst thing students can do is ignore their payments, because lenders will work with you,” said Lynn Rainforth, the assistant director of SUNY Buffalo State’s financial aid office.
There are two types of federal loans – subsidized and unsubsidized. The subsidized loans didn’t start accumulating interest until you graduated. The unsubsidized loans have been costing you interest since you received them.
Private loans, which are taken out after you have exhausted your federal loan limit, sometimes don’t have fixed interest rates. While they typically come with similar six- month grace periods, repayment plans differ from lender to lender, so options vary. Make sure you organize yourself and know what, and where, you owe money.
Private loans should be your last option, Rainforth said, because the interest rates may be higher once you graduate, and qualifying often requires a co-signer.
The standard repayment plan for federal loans, which borrowers are automatically enrolled in, divides the amount owed equally over 10 years, with 120 payments. Before the bills pile up, make yourself a budget and figure out how much you can afford.
And if you can do it, it’s worth paying more than the minimum to get the loans paid off faster and reduce your interest costs.
Ideally, you’re using your grace period to build up your finances. If you have a job, start putting money aside in a savings account. This can be an emergency fund to go go to if there comes a month you’re short for your payment. If saving is hard for you, create a savings account you know not to touch. Have your paychecks split between two accounts automatically to keep an allotted amount of money out of your personal spending account.
Get yourself in a money-conscious mind frame. How much are you spending on coffee a month? Or on cable or your telephone? Think about what you can eliminate, or find a cheaper alternative to, because you may need that “extra” money to meet your payments.
Don’t rule out moving back home if you have willing parents. There’s a stigma attached that’s worth ignoring if it means keeping yourself afloat financially. Even if it’s just for six months, it’s money you can build up to start knocking off loans. If mom and dad aren’t an option, look to get roommates to help decrease your rent per month.
Even if you’ve started your professional career, consider getting a part-time job on the weekends to get the loans paid off faster.
Financial planners recommend you work to pay off the loans with the highest interest rates first. Steven Elwell, a certified financial planner for Schroeder, Braxton & Vogt, said you should sit with the standard payment plan if it doesn’t put you in great financial distress, because extending your payment plan typically means paying more money in the long run.
Altering your payments
If your budget doesn’t allow you to spend what lenders expect for your federal loans, there are a variety of alternatives:
• Income-based contingent repayment, ICR. It is the “most flexible” income-based repayment option, according to Betsy Mayotte, the director of compliance for the Boston-based nonprofit American Student Assistance. In order to receive it, you have to prove a partial financial hardship.
Under ICR, monthly payments are calculated based on family size, adjusted gross income and the total amount of direct loans held. If you still have debt after 25 years of payments, the remainder will be forgiven.
• If your debt is over the national average at $30,000-plus, you can go into an extended repayment plan, which lowers monthly payments by stretching them over 25 years, rather than 10.
• Graduated repayment allows borrowers to only pay the interest back on loans for up to four years. But payments will gradually increase and still be spread over 10 years. This could leave you in a deep hole if you don’t get that great job you’re counting on.
• The income-sensitive plan is for people who have loans through the Federal Family Education Program, which is the second-largest U.S. higher-education loan program after direct loans. For a five-year period, borrowers can pick between 4 and 25 percent of their income to go toward their loans.
• Consolidating your loans will put them all in one place and reset the terms and interest rate, but you can’t combine federal and private loans.
There are also ways to not pay your loans at all.
For some career paths – like teaching, nursing, the military or volunteer work – the federal government has programs that could cancel loans. The Federal Perkins Loan Program can cancel some, or all, of loans for applicable careers. There’s no standard application to fill out to receive the cancellation; you have to contact the school you attended to start the process.
There isn’t a “one size fits all method” with managing your student loan debt, said Paul Atkinson, the president of Consumer Credit Counseling of Buffalo. Those who are struggling should reach out for assistance before making big decisions.
Staying in school
One way to postpone the pain of repaying the federal loans is to stay in school, though Elwell said graduate school only makes sense if there’s a specific job you know you’re going to get following your education. Becoming a “professional student” without a career plan can be just delaying the inevitable.
Andrew Moser, a graduate from the University of Notre Dame, is deferring payment on his $16,300 in loans by attending graduate school for sports management at Canisius College. Moser is part of a graduate assistantship program that waives his tuition in exchange for working part time in the college’s admissions office; he has taken out some loans to cover living expenses.
Moser, who works part time in the Buffalo Bills ticket office, plans to pay off his loans, after graduation, in less than 10 years to avoid the compounded interest.
“Had I not got an assistantship, I wouldn’t have gone to grad school,” Moser said. “I probably would have got a full-time job.”
He knew how crippling the added debt would have been. “It’s just kind of crazy,” he said, thinking of people he knows in over $40,000 in debt. “Some people don’t seem to weigh the cost of their education.”
As one of seven children with an impressive academic record, Moser was able to get grants and scholarships to cover most of his tuition costs for his undergraduate education.
Debtors should focus on repayment first, but there are deferment options that should be used as a last resort in order to avoid defaulting, Mayotte said.
Unemployment deferment is available if you’re working less than 30 hours a week while seeking a permanent, full-time job without success. There is also deferment for people experiencing economic hardships, and forbearance is a possible option for those who don’t qualify for deferment. With forbearance, however, the loans will continue to accrue interest while you’ve postponed payments.
From 2006 to 2008, undergraduate students faced interest rates of 6.8 percent, which dropped down to 3.4 percent by July 2011. Rates briefly shot back up to 6.8 on July 1, 2013, until President Obama signed a law that ties the rates to financial markets, bringing current rates down to 3.9 percent.
But if the economy improves dramatically, rates will increase for future borrowers. The law sets caps at 8.25 and 9.5 percent for subsidized and unsubsidized loans, respectively.
Financial planners emphasize the best way to handle student loans is to ensure you’re not taking on more than you can handle and borrow only what you need. This may mean going to a state or community college for two years and then transferring if the private school of your dream’s financial aid package is out of reason.
As Moser pointed out, “It’s not free money.”