By Marilyn Kennedy Melia CTW Features
on September 16, 2018
Congratulations. You’ve earned that degree, and now will put it to good use. Exciting years are ahead. Oh, except, those student loans are no longer a far-off future concern. Naturally, you’d like to keep putting off the day of reckoning.
Fight that impulse and take a slow, deliberate look at your loans, experts advise. Knowledge of your rights and options greatly increase the odds that your payback will go smoothly — and more quickly — than if you stumble into trouble you could have avoided.
So here’s a primer on what to know for a more painless payback.
Take a good look
All schools must have their graduating students go through exit counseling if they have federal students loans. “It could be in-person counseling or electronic,” said James Kennedy of Indiana University.
Some graduating students will be surprised at the total if their school didn’t do yearly counseling, said Holly Morrow of the non-profit uAspire.
With one of the two types of federal loans, the Perkins, extended based upon a student’s financial need, payments don’t begin until after a nine-month grace period following graduation. With the other, Stafford loans, there’s a six month post-graduation grace period.
In exit counseling, you’ll be directed to visit government websites such as www.studentaid.gov, www.studentloans.gov or the National Student Loan Data System (www.nslds.ed.gov), where you can see account information for each loan.
Decide on the best payment plan
The standard payment plan for federal loans sets the monthly principal and income bill so that the loan is paid in 10 years.
If you have a job lined up, you can estimate if the standard repayment seems manageable on your income.
“If total debt at graduation is less than your annual starting salary, you should be able to repay your (federal) student loans in 10 years or less,” said Mark Kantrowitz, publisher of www.privatestudentloans.guru.
If you’re one of the about 12 percent of undergrad students who also borrowed private loans from lending firms (federal loans are extended by your school), you’ll have to add in the cost of those private loans.
Should the standard payment on your federal loans seem unmanageable, there are other options, such as “income-based” repayment, that gauge what’s owed based on your monthly income, but stretch the term past 10 years.
A school loan counselor can help you determine the right repayment plan, Kennedy said.
“At the end of the grace period,” said Diane Cheng of the Institute for College Access and Success, “you are placed in a payment plan.” Unless you deliberately indicate that you want a specific plan, the standard plan is the default option.
If you don’t have a job at the end of the grace period, Cheng suggests designating an income-driven plan where “your payment will be a percent of your income … which is zero (until you are employed).”
You can switch plans in the future, Kennedy said.
Bundle loans together … or not
If you borrowed each year, you’ll have different federal loans, and if you transferred schools and borrowed, you might have different “servicers,” or organizations that bill and collect your payments, Kennedy said.
However, “in the last few years, the Department of Education has been trying to curb (multiple) servicers,” Cheng said.
For simplicity, it’s possible to consolidate several federal loans into one. The interest rate on a consolidated loan is the weighted average of the rates of each loan in the bundle, rounded up to the nearest one-eighth of a percent, Kantrowitz said.
The advantage to separate loans, though, is if the interest rate on one is higher than the others, when you have extra funds you can prepay the higher-cost loan, Kantrowitz said. And if you’re thinking you might qualify for public service loan forgiveness, be careful about consolidation, Cheng said, pointing to www.IBRinfo.org for more information.
Most experts advise against consolidating federal loans with private ones into one large private loan, because even if you can get a lower interest rate, you lose the attractive repayment and other options on federal loans providing protection if you run into financial trouble.
Put payments on auto-pilot
To ensure that you pay promptly, avoiding dings to your credit and late fees, it’s best to direct that bills are automatically deducted from your banking account. In fact, it’s common to be offered a .25 percent discount on the rate for automated payments.
It also might be possible to set up one payment even if you haven’t consolidated multiple federal loans, Cheng said.
“Some private lenders offer discounts — .25 or .50 off the rate — as an incentive for borrowers to sign up for auto-debit and electronic billing,” Kantrowitz said.
Talk about trouble and anything else
Any time you lose your job, or otherwise can’t keep up your payments, call your loan servicer as soon as possible, Cheng said.
Deferments, where payments are postponed without accruing interest, and forbearance, which provides a payment break with interest still accumulating, are other options.
Attempt to resolve any problem or question with a servicer early, and not only with a call. “It’s best to document everything in a written letter and to keep a photocopy,” Kantrowitz said.
If you have a complaint with a servicer that you can’t resolve, use feedback.studentaid.ed.gov, which is run by the U.S. Department of Education, Cheng said.
Pay more when you can
When extra money falls into your hands — you’re paid a bonus, for example — you might want to consider pre-payment to whittle down the years you’ll be paying student loans. Experts advise keeping emergency savings, however.
When you have funds to tap for emergencies, all federal loans allow prepayment without penalty, Cheng said. Private lenders each have their own rules.
“Include a letter that specifies the loan ID number and say to apply the extra payment to the principal balance of the loan and to not treat it as an early payment of the next installment, “ Kantrowitz said.
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