Most college graduates have been out of school for around a month now, and don't even realize there is a little student loan clock ticking down somewhere. These graduates will shortly get a notice telling them how much money is due and when they need to start making payments -- usually about six months after graduation. This can come as quite a surprise to many. The best strategy is to be prepared and do some legwork now so they will have a plan in place to repay these loans.
Without a plan these recent graduates could become part of the one in 10 who defaults on their student loans, risking high penalties and ruining their credit ratings before they even get into a full-time career. A credit rating might not seem too important now but it could impact their ability to get a job, buy a car, or finance a home. Student loans must be repaid even though the student may not have yet landed the job of his or her dreams. If payments are not made, they could see any wages they make get garnished or lose any federal tax refunds they might be anticipating.
The first step in building a strategy is to determine whether the student holds federal or private loans. If the student holds multiple federal loans it might make sense to consider a Direct Consolidation Loan, resulting in a single monthly payment. Private loans are not eligible for consolidation under this program.
Some students might be eligible for a deferment or forbearance, which allows them to temporarily postpone making federal student loan payments or to temporarily reduce the payment amount. Situations where a deferment might apply include attending graduate school, military service, inability to find full-time employment, or a period of economic hardship. Since deferments or forbearances are not automatic and must be applied for, it is best to take a proactive approach and look down the road instead of trying to apply after the expected repayment period begins.
Many students don't realize that federal student loans have several repayment options available. A standard repayment plan includes a fixed payment over a period of time that usually lasts up to ten years, while a graduated repayment plan starts with a lower amount and then increases over a repayment period of up to ten years. Certain students may be eligible for an extended repayment plan, where payments may be fixed or graduated for a period of up to 25 years.
Other repayment options include an income-based repayment plan (IBR), where maximum monthly payments are 15 percent of discretionary income. Payments change as income changes, with a repayment period of up to 25 years. A pay-as-you-earn plan allows for maximum monthly payments of 10 percent of discretionary income. Payments also change as income changes, with a repayment period of up to 20 years. There are also income-contingent repayment plans and income-sensitive repayment plans.
Find the Plan That is Best for Your Situation
Of course there are pros and cons to each of these strategies, so it is usually advisable to sit down with a professional college financial advisor to determine which one is best in each individual situation. But it is crucial that graduates start thinking about this process now while there is still time to resolve any disputes, consolidate loans, or analyze the various options. If students don't take control of this process the loan servicer will just tell them what their payments will be, which may not always be the best option for the student.