The good news for this season’s new college graduates is that the economy is booming, the job market is tight and ripe with opportunity. The bad news: There’s a good chance that those new grads are buried in debt, the bulk of which comes due a few months after leaving school.
About half of U.S. college graduates borrowed their way through higher education, experts say. These students are now graduating with student debts amounting to between $12,000 and $15,000 on average, according to the U.S. Department of Education and the National Center for Education Statistics. Those who opted for graduate school often owe far, far more.
Students who handle these loans poorly can hurt their ability to buy a house, a car or even get better jobs in the future. On the bright side, the rules of student lending are stacked in the student’s favor. Better yet, those who know a few tips, can cut the cost of repaying their debts by thousands of dollars, reduce their federal tax bills and build great credit ratings too.
What do you do?
– Tabulate and evaluate your debt. The key to getting started on the right foot is to tabulate precisely how much you owe and with what type of loan. Make sure you pay attention to what type of debt you have, says Antonio Olivero, manager of academic services at the Student Loan Marketing Association–better known as Sally Mae–in New York.
There are two basic types of student debts: Subsidized and unsubsidized. If your loans are subsidized, the government will pay the interest while you are in school and until you need to start repaying the loan about six months after graduation. If the loan is not subsidized, your interest accrues and is added to the debt you need to repay.
Needless to say, those who have subsidized loans can take a far more leisurely approach to repayment than those with unsubsidized loans. In fact, if you have an unsubsidized loan, you’re wise to start repaying the loans the moment you get a job, even if that’s months before payments are due, says Bob Murray, a spokesman for USA Group, a big student lender. That cuts your principal balance far faster and saves you a small fortune in interest charges, he adds.
– Evaluate your payment options. Generally speaking, students are given three or four repayment options.
With standard repayment, the lender divides your debt into 120 equal monthly payments. As a simple example, if you have a $10,000 debt at 8.25 percent interest, you’d pay $122.65 per month, or $14,718 total. Your loan is paid in full in 10 years.
With graduated repayment, your monthly payments start out small, but rise over time. The actual amount of each payment will vary based on the plan–some lenders keep payments low for two or three years, and then pop the payments up for the remainder of the term. Others offer a more gradual schedule. Consequently, the amount of your monthly payments and the total cost of a graduated payment plan can vary markedly.
Income-sensitive and income-contingent repayment plans are aimed at helping students keep their monthly payments as low as possible while they are working in low-paying jobs. The difference between income-sensitive and income-contingent programs are who offers them and just how low your payments can go.
Private lenders, such as Sally Mae and USA Group, offer income-sensitive options, that require that the student’s payments at least cover the interest accruing on the loan. With income-contingent repayment plans, offered solely through the government’s direct loan program, your monthly outlay can be lower, but your unpaid interest can accrue and add to your loan balance.
Finally, if you owe a lot, you may be able to opt for a long-term repayment plan, which simply reduces your monthly cost by spreading your payments over more years.
The benefit of long-term repayment is lower monthly costs. The detriment is that you pay substantially more interest. Consider a $60,000 loan at 8.25 percent. If you pay it off over 10 years, you’ll pay $736 per month, or $88,310 total. If you pay it off over 30 years, you’ll pay $451 per month. But because you make 240 more payments, your total cost is $162,360.
– Make payments automatic. Most lenders, including Sally Mae and USA, will cut your interest rate a quarter percentage point if you sign up for an automatic debt payment plan, which allows the lender to automatically deduct your monthly payment from your checking or savings account. If you never bounce a check or make a payment late during the first four years of repayment, they’ll also drop your interest rate by two full percentage points. That cuts the interest on your 8 percent loan just 6 percent.
– Deduct your interest. The 1997 tax law makes interest on student loans deductible during the first five years of repayment for those who earn less than set amounts–$40,000 when single, $60,000 when married filing jointly. The maximum student loan interest deduction is $1,000 in 1998.
– If you can’t pay, call for help. In many cases, you can qualify for deferments; in others, you may be able to stretch out repayment to reduce the monthly outlay.
