Congratulations! You have just graduated from college. We hope that you have a job, because you almost certainly have debt. Around 70% of college students graduate with some degree of debt, with the class of 2012 claiming an average debt of $29,400. If you went to an expensive private college, this amount could be far higher. How do you ever pay that back, especially if job prospects are dim?
First, understand that you must pay back student loans and there are serious consequences to not doing so. (If you graduated from college without understanding the difference between a loan and a scholarship, perhaps you should ask your college for a refund.)
Defaulting on a student loan devastates your credit score and makes your total loan balance due with penalties. Wage garnishment, seizure of any tax refunds, and burdening co-signers (aka parents) are possible. Default periods are typically after six to nine months of non-payment for federal loans, and less for private loans.
Some student loan repayment tips:
- Understand Your Loan Terms – This was probably pretty far down your list of college priorities, but now it is quite important. Your terms will summarize your repayment choices and the options for partial forgiveness, term modifications, and grace periods. Grace periods are often six to nine months but vary by type of loan, and it is extremely important to know when that first payment will be due.
Federal Loans can be checked online at the NSLDS (National Student Loan Data System) run by the U. S. Department of Education. For private loan status, check directly with the lender. If you are still having trouble, ask your school for assistance.
- Keep Up With The Lender – If you move and important notices are not forwarded to you because you did not notify them of the address change, that is not the bank's problem. Make sure your lender has your current contact information. Also, do not let unopened letters from the bank pile up – you are not in college anymore. Getting bad news is unwelcome, but missing deadlines because you choose not to be informed of bad news is even worse.
- Choose Repayment Options Wisely – Federal loan repayments are on a ten-year repayment plan, but there is a variety of options for repayment. Some are tied to your income and have partial forgiveness paths (typically after 25 years of payments). Check out the options at http://studentaid.ed.gov . You may also qualify for deferment or forbearance, options which allow you to postpone or reduce payments under hardship conditions, such as unemployment.
For private loans, you will need to work out terms with the lender directly, but most lenders have some degree of flexibility. They want you to pay back the loan and are willing to work with you. It is not in their best interests for you to default.
- Pay What You Can – Make sure you can make payments on whatever plan you choose, and If possible, occasionally try to add some extra payment to be applied directly to the principal. You will drastically reduce your interest this way, especially early in the loan term.
- Pay Highest Interest First – Private student loans are almost always going to have higher interest rates and less flexibility than federal loans, so if you can make any extra payments, apply them here first – unless you have even higher interest rate credit card debts. You need to whittle those payments down first, and limit your credit spending.
The most important thing is to pay what you can and work with your lender; they will work with you as best they can if you are struggling to stay current. Don't ignore your student loan obligations – otherwise you will spend many years digging out of a completely avoidable mess. On the bright side, if you take this financial obligation seriously and are disciplined about making timely payments, your student loans can be the springboard to a lifetime of outstanding credit.Find out quickly at what rate you can refinance your student loan.