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How to Make the Payments After You Make the Grades

By Albert B. Crenshaw
Washington Post Staff Writer
Sunday, June 30 1996; Page H01

It's summer, and thousands of new college graduates can stop worrying about their GPA. Instead they can start worrying about their APR -- the annual percentage rate on their student loans.

Soaring college costs and slumping financial aid have made borrowing a key element of most middle-class students' college careers. And graduation now not only launches young people into the world, it starts the clock ticking toward that fateful day six months hence when they have to start paying back the loans they ran up during their school years.

The debts are daunting.

Borrowing through federal student loan programs alone totaled more than $25 billion last year, according to the Student Loan Marketing Association, a government-sponsored corporation here that buys up billions of dollars of these loans every year.

The average student graduates with $11,000 in debts, and many have far more than that. Federal loan programs are limited to a total of about $17,000 over a college career, but with private loans on top of that students can emerge from school with debt burdens of $30,000 to $40,000, according to financial planners and other experts in the field.

Some new graduates, of course, land well-paying jobs that make it relatively easy to handle those new monthly payments, while others are able to get help from mom and dad. But for many more, the debts are a burden that can distort their lives in all sorts of ways, forcing them into a grim economic struggle at a time that traditionally was free from care and full of hope and adventure.

"There's a sense of real resignation" among many graduates, said financial planner Philip C. Johnson, of Clifton Park, N.Y.

Heavy debt "clearly puts you in a position where other kinds of life decisions are either postponed or changed -- career choices, decisions like where you're going to live, whether to move back in with mom and dad," said Johnson, who was a college administrator for 14 years before becoming a planner.

And there's another price to pay. Although in the past the federal student loan program was greatly abused by thousands of graduates and ex-students who simply walked away from their loans, rules have been tightened and default today has nasty consequences. Tax refunds can be intercepted, your wages may be garnisheed, and you will be reported to credit bureaus.

"People used to say, `I'm in default on my student loan, but who's going to know?' Now we get calls from people at car dealerships saying, `I'm 90 days delinquent on my student loan and I can't get my car loan approved, how can I clear it up? '" said Scott Miller, director of government relations at Sallie Mae.

Even after graduation, student loan programs offer some ways to ease the burden, but they generally don't make it go away -- and in the long run they often make it more expensive.

So if you are a new graduate, what can you do?

Under either of the two federal student loan programs, the repayment option you choose is not set in stone. If you start, for example, with the standard repayment plan and find you can't manage it, you can switch to one of the others. And having switched, if things get better, you can go back, although you can accomplish much the same thing by making additional payments of principal.

Both programs also offer deferrals. If you decide to go to graduate or professional school, you can put off repaying your undergraduate loans while you are enrolled. If you can't find a full-time job, or repayment represents an economic hardship, you can defer repayment for as long as three years. If you have a need-based, subsidized loan, you are not charged interest during the deferral. With unsubsidized loans, interest continues to accrue that you ultimately will have to pay.

Private bank loans, in contrast to government programs, are subject to whatever terms you and the bank agreed to. These can't usually be consolidated with other student loans, though Sallie Mae this year started a new program offering a package of federal and private loans that will allow students to apply for their loans in one place and repay them to one place.

The older government program relies on private lenders and government guarantees. Lenders, typically banks, lend the money and the government promises to repay if you don't. Sallie Mae makes a secondary market in these loans, meaning that the company buys many of them from the original lenders, putting new cash into the lenders' coffers. Sallie Mae then collects the payments from you.

In the newer system, which has been operating for just two years, the government makes the loans itself through the Education Department. Only about 200,000 of these loans have entered repayment, so recent graduates are more likely to be in the older program.

The programs have similar but not identical repayment options:

Standard repayment. The cheapest option, but with the highest payments, you pay off your loan in fixed installments over one to 10 years, depending on the amount of the loan. If your debt is $10,000 at 8 percent, for example, your payments would be $121 a month for 10 years and would total $14,520, according to Sallie Mae.

Graduated repayment. This is designed for the graduate whose income starts out low but rises. Sallie Mae offers two versions; in one you pay only interest for the first two years, in the other you pay only interest for four years. Thereafter, you pay principal and interest and the loan is paid off in a total of up to 10 years. The government direct loan program allows payments that rise every two years over a term ranging from 12 to 30 years.

For a cost comparison, Sallie Mae's four-year, interest-only version on a $10,000, 8 percent loan would be $67 a month for four years and $175 a month in years five through 10, for a total of $15,816.

Extended payment. By stretching out your debt -- to as long as 30 years -- you can lower your payments, but the total interest costs will be higher. Both programs also allow you to combine this with graduated payments, which further cut the early payments and raise overall costs. For example, taking that $10,000 loan again and stretching it to 15 years with graduated payments could look like this: four years of $67 per month payments, $82 a month in year five, $100 a month in year six, and $122 a month in years seven through 15 for a total of $18,568. Paying it off in level payments of $96 a month would bring the total to $17,204.

Other options. Both programs also offer plans aimed at low-income graduates that base payment amounts on income, and both offer consolidation arrangements that simplify payments and bookkeeping. Note, though, that while student loans issued in recent years carry variable rates, they are converted to a fixed rate if you consolidate them.

"We take a snapshot" of the interest rates on your loans, weighting it toward those with larger loan balances and "do the fancy math" to come up with the fixed rate, said Sallie Mae's Miller.

Sallie Mae also offers an interest rate reduction of 1 to 2 percentage points (depending on the loan type) for the remaining term of the loan if you make your first 48 monthly payments on time. Two points would save you $478 over the life of that 10-year, $10,000 loan with an original rate of 8 percent.

Easy to say but not so easy to do -- but still the best approach, according to Johnson and others -- is to pay off your loans as quickly as you can. In federal programs, there are alternatives that allow you to stretch out payments for as long as 30 years under certain circumstances, but these are to be avoided if possible. Not only do you pay more interest, but it raises the interesting possibility that you could still be paying on your loan when your own children are taking out theirs.

© Copyright 1996 The Washington Post Company

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