THE BLOG
12/08/2016 11:16 pm ET

Student Loans Repayment Time

Student loans now have the potential to cost the federal government an estimated $100 billion as more borrowers opt for lower income-based payments and eventual loan forgiveness. That's the conclusion of a new report by the Government Accountability Office (GAO).

With more than $1 trillion in student loans outstanding (93 percent of recent loans coming from the federal government), an entire generation has graduated into debt that may not be easy to repay. And if you graduated last spring, now is the time you must start the repayment process.

Federal student loans carry high rates and cannot be defaulted on, even in bankruptcy. But federal student loans do offer some payback alternatives, including deferral and forbearance. The most popular program is income-based repayment (IBR), which caps loan payments at 10 percent of disposable income, with forgiveness of the balance after 20 years of payments. An estimated 24 percent of recent grads opting for income-based repayment.

It's widely expected that the Trump administration will try to shrink federal involvement in student loans, driving borrowers to the private market -- to lenders like Discover, Wells Fargo and Sallie Mae. Since the election the shares of Sallie Mae have soared.

Private student loans don't offer those generous payment reduction options. Lenders require most private student loans to have a cosigner, giving the lender more security. It's almost impossible to refinance private student loans with the original lenders, and aside from a quarter-point break on the rate if you pay though an automatic monthly deduction, you'll likely be stuck with your original deal.

Private student loans are considered to be in default after 120 days of nonpayment (vs. 360 for federal loans). If you default on a private student loan, the lender will go after your cosigner, likely your parent. They can add fees and charges that run up the balance, or turn your account over to a debt collector and ruin your credit. They can place a lien on your property or that of your cosigner. And it's almost impossible to erase the loan through bankruptcy.

If you have a student loan coming due, what should you do now?

--Get organized. Loan repayments must start six to nine months after graduation. Either use a spreadsheet (there's a useful one at www.Edvisors.com) or create your own list, including the name of the lender, the account number, the amount outstanding, rates and payment due dates.

Note: If you can't remember all of your loans, go to the National Student Loan Data System (NSLDS) at NSLDS.ed.gov to find a record of all your Federal and private student loans.

--Choose the shortest term option. There's no sense in stretching out your payments over 20 years. Monthly payments may seem more affordable, but they will cost you a fortune in interest over the loan run. To see the impact, check out the loan repayment calculator at www.Finaid.org.

--Consider the alternatives. Don't despair. That same Finaid loan calculator will also show you how to make payments more affordable through income-based reduction. Learn more at IBRInfo.com.

--Know your options with federal loans. Beware of consolidating them into a private loan and losing those options. However, consolidating your federal loans could simplify the repayment process. The interest rate on a federal consolidation loan is based on the weighted average of the interest rates on the borrower's loans, rounded up to the nearest 1/8th of a point. Consolidate federal loans at StudentLoans.gov.

--Investigate private student loan consolidation and refinancing. At PrivateStudentLoans.com you can learn about the limited possibilities of consolidating these loans. And if you have a good job and good credit you might be able to completely refinance your private or federal student loan at significantly lower rates at SOFI.com.

Whatever you do, don't be in denial about your student loans. Start the process now, consider alternatives carefully, and make your education pay off by making smart repayment decisions. It's the first step toward building your future credit. And that's The Savage Truth.

CONVERSATIONS