NEW YORK — Graduating into a barren job market is stressful enough. When massive student loans await, the rite of passage can be downright terrifying.
Depending on the type of loan, graduates typically have about six months before the bills start arriving. Among the matters to sort out as the clock ticks down: picking a repayment plan, consolidating loans, weighing deferments.
“A lot of people are coming out of college with more debt than ever before, and they’re graduating at a time when it’s going to be harder to get a job,” said Lauren Asher, president of the Institute for College Access &Success, a California-based nonprofit that runs the Project on Student Debt.
The group estimates that about two-thirds of graduates from four-year universities have student loans, with an average debt of about $22,000.
Still, Asher points out that knowing your options can ease the burden. Here are five steps to help master your student loans.
1. Know what you owe
The first step is understanding how a student loan works. Although the interest rate on federal loans tends to be favorable, it kicks into gear as soon as the loan is taken out. That means you’ve got four years of interest on top of your loans by the time you graduate.
And the meter on interest doesn’t stop running during the grace period before repayment begins. The exception is with subsidized federal loans, in which the government picks up the interest until the loan becomes due. Students need to demonstrate financial need to qualify for subsidized loans. Interest on unsubsidized federal loans begins accruing right away.
To see all your federal loans and terms in one place, check www.nslds.ed.gov/nslds_SA. For private loans, you need to contact the lender if it hasn’t already contacted you.
2. Pick a plan
The standard repayment plan for federal loans is typically 10 years.
Extended plans can be tempting since they require smaller monthly payments. But it also means you’re paying interest over a longer period, which pushes up the total cost.
“Use as short a loan term as possible. You don’t want to be paying your own student loans when your kids are graduating,” said Mark Kantrowitz, publisher of FinAid.org.
If you can’t keep up with the payment schedule you picked, you can always switch plans. You’re allowed at least one change a year with federal loans.
A new option for federal loans starting in July is the Income-Based Repayment program. Eligibility is determined by weighing your debt level against your income.
There may be no monthly payments required for those who earn less than a certain threshold, about $16,000 a year. Otherwise, your monthly payment is generally capped at 15 percent of your earnings above that amount.
A calculator at www.ibrinfo.org can help determine whether you qualify.
3. Consider postponement
You can defer payment on federal loans under select circumstances, including military service, unemployment and economic hardship. With private loans, the rules on postponing payment (called “forbearance”) are set by the lender.
Try to avoid delaying payment if you can, since interest continues accruing unless you have a subsidized federal loan.
Graduate school is one way to defer payment on most federal or private loans, but that can add to the loan amount.
To qualify for unemployment deferment on federal loans, you need to demonstrate that you’re looking for work. You could also qualify for economic hardship deferment if your income is below about $16,000, you get public assistance, or you work in public service.
Deferment for unemployment and economic hardship are each limited to three years.
4. Should you consolidate?
A consolidation loan lets you combine loans to make a single monthly payment. You also get a fixed interest rate for the life of the new loan.
This might benefit those who got federal loans before July 2006, when interest rates were variable. You might even want to “consolidate” a single federal loan if it has a higher, variable interest rate.
If you’ve been out of school for a while and are running into trouble making payments, a consolidation loan is a way to get renewed deferment rights. Most federal loans can be consolidated under the Federal Direct Loan Consolidation program.
One drawback to consider is that consolidation usually extends repayment, meaning the overall cost of the loan will be higher. A calculator on Loanconsolidation.ed.gov can help determine whether a consolidation loan will save you money.
5. Avoiding default
Defaulting on a student loan comes with some ugly consequences.
To start, the default will go on your credit profile and likely obliterate your chances of getting any other type of loan, such as a credit card or mortgage.
That’s because federal loans, with their favorable interest rates, are regarded as among the easiest to repay, said Kantrowitz of FinAid.org.
The cost of your loan will jump, too. On top of late fees, you’ll also be liable for collection costs, including court and attorney fees.
The government can also garnish wages up to 15 percent, a practice that can follow you late into life. Student loans typically aren’t discharged in bankruptcy filing, either.
The good news is that defaults on student loans can be rehabilitated and erased from your credit report. With federal loans, that requires nine full payments during a span of 10 months. Private lenders might not offer rehabilitation programs.
Don’t panic if you’re having trouble making payments. You have to be at least 270 days late on a payment for a federal loan to go into default. The period for private loans is typically shorter — 212 days with Sallie Mae.
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