Managing Student Loans

Graduation time is rapidly approaching. While this can be a hectic period of adjustment for college graduates, there is one graduation issue that absolutely must have your immediate attention – your student loans. Whether federal, private, or a combination of the two, it is imperative that every student have a plan in place, preferably BEFORE graduation, on how to manage and pay off this debt.

Recent headlines stated that student loan totals recently surged above $1 trillion dollars. While there is some dispute as to whether this was indeed a surge or just a re-calculation, there is no disagreement that this is a huge amount of money. According to Finaid.org, the average amount of debt per student in 2010-2011 was $27,200, up 54% from a decade earlier. However, according to Mark Kantrowitz, publisher of the financial aid website, this figure is skewed by a relatively small number of individuals with high debt loads - mainly graduate students, those with private student loans, and those in default whose balances continue to balloon through penalty fees and interest.

Of course, this type of debt can be viewed differently than most kinds – it is in fact an investment in yourself, with the expectation that this investment will pay off over time in the form of higher earnings. A recent Pew Research Center analysis found that those with bachelor’s degrees earn almost $650,000 more over their lifetime than those who have only high school diplomas. 

But we are speaking in averages here, and these numbers may or may not apply to your individual situation. Especially for those just starting out, a heavy debt load can make it difficult to get established in life. And according to a recent Georgetown University study, the unemployment rate for recent college graduates stands at 8.9%, well above the 5% rate for all those with undergrad degrees.

So why be concerned about your student debt? Failing to pay your student loans on time can be very costly.  Repayments on many types of federal loans are required to begin six months after your graduate, leave school, or drop below half-time status. Missing just one payment can put a loan in delinquent status; after nine months the borrower will be considered in default, with the entire amount of the loan due immediately. The government charges late fees as well as collection fees for delinquent loans, adding to the balance owed. For those with federal loans, the government can seize social security payments, tax refunds, or garnish wages to collect the amounts owed. And unlike many other types of debt, student loans currently cannot be discharged or reduced by bankruptcy proceedings.

However, for federal loans especially (which comprise about 90% of student loans made), there are a number of repayment options available to you, including the ability to postpone repayment or in some cases have the loan amount forgiven entirely. The key is to plan ahead if you can, and communicate any possible repayment difficulties to your lender. Do not just stop making payments if you find yourself in difficulty – once the loan is officially in default, your repayment options are limited.

So what do you do if you have education debt and find yourself unsure of your repayment obligations, unemployed, or underemployed upon graduation?

1. Find out what type(s) of loan you have.

Information on your federal loans is available online at www.nslds.ed.gov. Here you can view your balances due, as well as the type and contact information for the servicer of your loan. Interest rates on loans can vary depending on the program type and when the loan was made. Note that private loans will not appear here – contact the private lender directly to find out the details and what your options might be for your private loans. Your school is required to provide exit counseling on managing your loans, so make sure you take advantage of this benefit.

Many of the options available for managing your loans depend on the type (FFEL, Direct, PLUS, Consolidation, or private), so it’s important you understand exactly what loan type you have.

2. Determine what repayment plans are available to you.

You have a choice of repayment plans, depending on the type of federal loan you have (note that FFEL loans are no longer offered as of Jun 2010).  Payments will vary depending on type of loan, amount owed, and length of the repayment period chosen (generally from 10 to 25 years). Like all loans, the longer you take to pay it off, the more interest accrues and the more you ultimately wind up paying. A relatively new repayment option is the Income Based Repayment (IBR) plan, which calculates a payment designed to be affordable based on your income and family size. While not everyone will be eligible for an IBR payment, once nice feature of the plan is that any loan amounts remaining after 25 years on the plan may be cancelled; if you work in public service and qualify for the IBR plan, the cancellation period is only 10 years.

You will be asked to choose a repayment plan once the grace period for your loan expires (generally six months after you graduate, leave school, or attend less than half-time). If you do not choose, you will be assigned the standard 10 year repayment plan. Note that you have the ability to change your repayment plan after your initial selection. Federal Direct Student Loans can have their repayment plan changed at any time (some conditions apply), while FFEL loans can be changed once a year.

3. Investigate your rate reduction options.

In some cases, you may be eligible for a .25% rate reduction in your loan rate if you sign up for electronic debiting. If you have a commercially-held FFEL loan and you participate in the Special Direct Consolidation Loan program (more on that below), you may be eligible for an additional .25% interest rate reduction.

Rates on loans vary depending again on the type of loan and when it was originally disbursed – some are fixed, some are variable, and some are eligible for special lower rates until June 30 2012. Visit www.studentloans.gov for more information on your loan rates.

4. Consider Loan Consolidation with a Federal Program.

Loan consolidation is basically refinancing separate loans into one large loan. There are currently two separate Federal consolidation programs – the Direct Consolidation Loan and the Special Direct Consolidation Loan. The Special program is available only until June 30 2012, and  only for certain borrowers who have eligible commercially-held FFEL loans.  Those eligible for the Special Direct Consolidation program will be contacted by their loan servicer, and should NOT apply for any other consolidation program until speaking with their current servicer.  This program provides an opportunity for an additional .25% interest rate reduction (on top of the .25% direct debit reduction). Other additional features are available through this program that do not apply to the traditional Direct Consolidation Loan program.

The traditional Direct Consolidation Loan program allows you to refinance your individual federal loans into one loan. One important feature of this program is that it may allow you additional deferment options if you have exhausted the deferment on your individual loans.

For more information on consolidation visit http://loanconsolidation.ed.gov.

5. Understand your deferment ,forbearance and forgiveness options.

A deferment is a postponement of payment on a loan, during which interest does not accrue if the loan is subsidized. Some situations that qualify for deferment include enrollment at least half time in an eligible postsecondary school or studying full time in a graduate fellowship program, unemployment, or economic hardship (limited to 3 years).

You may also be eligible for a deferment based on qualifying active duty service in the U.S. Armed Forces or National Guard.

In most cases, you need to submit a deferment request to your loan servicer along with documentation of your eligibility for the deferment.

If you can't make your scheduled loan payments, but don't qualify for a deferment, you may be eligible for a forbearance.  A forbearance allows you to temporarily stop making payments on your loan, temporarily make smaller payments, or extend the time for making payments. Some common reasons for getting a forbearance are illness, financial hardship or serving in a medical or dental internship or residency.  Military mobilization or a local or national emergency could also qualify you.

Contact your loan servicer if you find yourself in need of a deferment or forbearance. If you are in default on your loan, you are not eligible for a deferment or forbearance, which is why it’s so important to be pro-active in contacting your loan servicer.

Finally, your employment may qualify portions of your student debt for cancellation or forgiveness. If your loans were disbursed after October 1, 1998 and you are a full-time teacher in a low-income elementary or secondary school for five consecutive years, you may be able to have as much as $17,500 of your subsidized or unsubsidized loans cancelled.

Some non-profits, such as the Peace Corps, VISTA and Americorps as well as the Army National Guard also provide student loan incentives in return for service commitments. For more information on forgiveness, visit Finaid.org.

In summary, there are plenty of resources and options available to you when managing your student loan debt. The key is to plan ahead and be proactive if you encounter any difficulties.

Leslie T. Beck, CFP^®, MBA is a founding  member of Compass Wealth Management LLC  (Compass) (www.compasswealthmanagement.net) in Maplewood, NJ, and the 2012 President of the Financial Planning Association of New Jersey.