It’s that dreaded time of year for recent graduates: the end of the six-month grace period on student loans.
Whether you owe $5,000 or $50,000, having a handle on your education debt will help you avoid fees, keep your payments affordable and safeguard your credit rating. Don’t panic. Take a deep breath and check out these expert tips.
Know what you owe: Many lenders will mail you a notification with your required monthly payment once your loan is in repayment. The notice may come from companies with names like American Education Services (AES), Great Lakes or Nelnet. These are student loan servicers, the middle-men who collect your payments and apply them to your debt. Both private lenders — banks, credit unions and other financial firms that provide education loans — and the federal government use servicers to manage payments.
You can always be proactive and contact your lender or visit the Department of Education’s nifty student loan site (www.nslds.ed.gov) that lets you look up your federal loans. If you still can’t find any record of your loan, contact your school. Once you have all of the information, make a list of all of your loans, with the lender’s name, balance, interest and repayment status, said Lauren Asher, president of the Institute for College Access & Success, an education nonprofit.
Study up on your repayment options: Ten years is the standard repayment for federal loans, but you can extend the timeline if the monthly payments are more than you can handle. Keep in mind that you will end up paying more interest over the life of the loan, so the lower monthly bill may not be worth it to you in the end.
Federal loans come with more repayment options than private ones, Asher said. If you have federal loans and aren’t making much money, you may qualify for income-based repayment plan. These plans cap your monthly payments to a percentage of your income and, in some cases, forgive any remaining debt after 25 years of payments. If you work in the public or nonprofit sectors, you may qualify for loan forgiveness after 10 years of payments. Check out www.ibrinfo.org for more information on income-based programs.
Private loans are not eligible for the government’s income-based repayment plans, but some lenders will allow you to make interest-only payments if you are struggling. You may encounter a fee to lower your payments and the service is usually offered for a limited time.
Look into consolidating your loans: If you have multiple federal loans, you can consolidate the payments into one single monthly amount through the government’s Direct Loan program. Interest on a consolidated federal loan is calculated by taking the average rate of all the loans you’re combining, so it’s possible that you will not save money on interest payments.
Consolidation will often lower your monthly payments, but could ultimately cost you more over the life of the loan because the repayment timeline is extended. Still, combining your loans will reduce the number of bills you have to pay, making it easier to track your obligations, said Persis Yu, an attorney at the National Consumer Law Center.
She encourages borrowers to beware of scams that will charge you money to consolidate federal loans. The government offers the program for free. You can convert federal loans into private loans to consolidate all of your student debt, but experts caution against this.
“While it may be cheaper in the short run, you also could lose important rights and options, such as deferments, income-based repayment, and death and disability cancellations,” Yu said. She recommends that borrowers consolidate federal loans into a federal program, and all of their private loans into a private lender program, once they’ve read all the fine print.
If you have private loans, shop around for a consolidation program with a fixed interest rate, rather than a variable rate that can go up, Asher said.
“Be aware that in many cases, you may be getting a variable rate,” she said. “All federal student loans issued since 2006 have a fixed rate, where the rate stays the same, but private loans often carry variable rates.”
A growing number of community banks and credit unions will consolidate private student loans at rates as low as 4.75 percent. This could be a good option if you have private loans with interest rates over 6 percent, but remember your rate depends on your credit history and some lenders require you to have a co-signer.
Put more money toward your high interest loans: If you’re in a position to put more money toward your loans, pay off the ones with the highest interest rate first. That often means paying down private loans as quickly as possible.
You should also consider doubling up on your federal loan payments to lower the principal balance. Make sure to let your servicer know that you want that extra money to go toward the principal, rather than future payments. The payments you send in cover the principal, interest and any late fees, with money typically applied to the principal balance last.
Understand the difference between forbearance and deferment: If you’re having trouble making payments because of unemployment or health problems, act fast and contact your loan servicer to see whether you can suspend your payments.
You can either put your loans into forbearance or deferment. A deferment lets you postpone your monthly payments, without damaging your credit rating or accruing interest on subsidized loans — such as Federal Perkins, Direct Subsidized or Subsidized Federal Stafford loans.
Forbearance also lets you temporarily suspend your payments, but interest will continue to grow on both unsubsidized and subsidized loans. And if you don’t pay the interest while you’re in forbearance, the interest may be added to your principal balance.
“Forbearance is a very costly way to try and manage debt,” Asher said. “It can be a useful short-term debt management tool, but it is not a good long-term tool because interest accrues and capitalizes. Then you end up owing more principal and paying more interest on that larger principal.”
Being delinquent on your loan payments will harm your credit rating. Not paying your federal loans for nine months will throw you into default, which will ruin your credit. And having bad credit will make it difficult to buy a car, get a mortgage, rent an apartment or even land a job.
“While it is important to try to stay on top of all loans, federal loans have especially draconian consequences for default, such as wage garnishment and intercepting tax refunds,” Yu said. “Luckily, federal loans have a variety of flexible repayment options should borrowers need them.”
For more information on repaying your loans check out the Consumer Financial Protection Bureau’s interactive student loan site.