Setting Plan to Manage Debt Load
RISMEDIA, July 7, 2010--(MCT)--Like carrying unwanted pounds, many college graduates pack on a hefty load of student loan debt during their four years.
And in a tough job market with no guarantees of steady income after college, it can be daunting for graduates to shed those extra dollars.
The median amount of cumulative loan debt among U.S. college undergraduates was nearly $20,000 in 2007-08, according to the most recent College Board data.
At the University of California-Davis, the number of students graduating with student loans is "trending up" each year, said Katy Maloney, interim director of financial aid.
Of 5,700 graduates in 2008-09, more than half — 52 percent — had student loans, both government and private. The average UCD student loan amount at graduation was $19,403, Maloney said, "and I know it will be higher next year."
Not everyone owes, of course. Nationally, about 34 percent of 2007-08 bachelor's degree graduates had no student loan debt, according to "Who Borrows Most?," a national survey released in April by the nonprofit College Board.
And there are borrowing extremes, as well. Among the 2,985 UC-Davis undergraduates with student loans in June 2009, seven had racked up loan amounts of more than $100,000 each. (Most were out-of-state students who pay higher fees.)
"How much debt is too much is completely relative to the student," noted Patricia Steele, an education consultant who co-authored the College Board study. "If you have no job, $2,000 of debt is too much. And for some students, $40,000 is not too much if they have family assistance or are gainfully employed in high-paying professions."
Before graduation, most college students have a sit-down exit interview with their financial aid office to discuss repayment terms and options.
Generally, if you have a federal loan (not a private loan through a bank or other lender), you have a six-month grace period before you're obligated to start payments. The repayment period can be anywhere from 10 to 30 years, depending on income, debt amount and other circumstances.
You should also check in with the National Student Loan Data System (www.nslds.ed.gov), which lists details on your federal loans. If you've accumulated multiple loans over many semesters, it's a good place to get a handle on exactly what you owe and to whom.
"It should be your first financial pit stop" after graduation, said Reyna Gobel, a financial writer and author of "Graduation Debt: How to Manage Student Loans and Live Your Life."
"While the economy is tough," she noted, "graduates can take a deep breath because there are more repayment options than ever before."
Standard repayment plans for student loans are 10 years. You should also consider a consolidation loan, which lets you combine multiple loans into one. For details, go to: www.studentaid.ed.gov.
Create an online chart or a file folder of all your loans. Keep track of all correspondence and phone calls with your loan providers. Take notes whenever you talk to lenders about payments or terms. If you change your address, phone or e-mail, don't forget to inform your lender.
To find a monthly amount that suits your budget, try a repayment calculator, such as the one at www.collegeboard.com. For instance, if you've got a $10,000 subsidized federal student loan and have a job making $30,000 a year, the CollegeBoard calculator estimates you can pay $109 a month, assuming a 10-year repayment period of 120 monthly installments, with an annual interest rate of 5.6 percent. That's about 4 percent of a $2,500 monthly paycheck.
Typically, it's recommended that you pay no more than 10 percent to 15 percent of monthly income toward student loans.
And if you can pay a little extra each month or pay down the interest while waiting for your six-month repayment plan to start, so much the better.
"Don't kill your budget to do it. It doesn't have to be $100 or $200 a month ... even $5 extra per month could save months off your total repayment time," said Gobel, whose book charts how even small amounts — say $20 a month — can reduce the overall repayment time on a 25-year, $50,000 consolidated loan at 4 percent by almost three years.
Also, for many graduates, depending on income, interest on student loans is tax-deductible.
If you're having trouble making payments, contact your lender immediately. Ask about changing your payment due date or repayment options, such as deferment or forbearance.
A temporary deferment can be granted, for instance, if you're in graduate school, in a medical/dental residency or serving in the military. Certain economic hardships also qualify.
Forbearance lets you suspend payments up to one year, primarily for economic reasons, such as job loss or medical problems.
But keep in mind: Postponing payments will add to your overall debt. Under forbearance, for instance, your accumulated interest is added to your existing loan balance. Don't use these options unless you really need them, say financial advisers.
The worst thing you can do with student loan payments is ignore them.
If you miss a payment — even one — you could get hit with late-payment penalties. And if you skip paying for extended periods, you could fall into default, which could damage your credit history and make it more difficult to get a credit card, finance a car or buy a house. A Stafford loan, for instance, goes into default if you don't make payments for nine months.
Gobel, who racked up $63,000 in student loan debt years ago earning a bachelor's and two master's degrees, learned the hard way. She had a mix of 16 different loans after finishing college. But several years ago when consolidating them for a lower interest rate, she overlooked one and it went into default.
She's now on track to get her interest rate cut in half — from 4 percent to 2 percent — after 36 months of on-time payments. That alone will shave about eight years off her overall 30-year repayment period, saving "thousands," the Dallas-based author estimates.
Her hard-earned wisdom: "Don't punish yourself. Learn how to manage your student loan debt. Think of it as one more thing, like an electric bill."
STUDENT LOAN CHANGES
A number of changes to federal student loans went into effect July 1 for new and current borrowers. Among them:
—All federal loans are now direct from the U.S. Department of Education, rather than through federally subsidized lenders. (Private loans from banks and other lenders are still available.)
—Income Based Repayment (IBR) plans that launched last summer have been adjusted so that married couples with student loans will no longer pay higher rates than two single student borrowers. IBR is designed for those whose income is higher. Adjustments also have been made to accommodate those whose loan debt has increased since leaving school, often due to deferred payments.
—Interest rates on new subsidized Stafford undergraduate loans will drop from 5.6 percent to 4.5 percent. Existing Stafford loans with variable interest rates will also get a small rate drop.
—Pell grants, which are needs-based, have gone up $200, to $5,500, potentially reducing the need to borrow.
Source: Institute for College Access & Success
(c) 2010, The Sacramento Bee (Sacramento, Calif.).
Distributed by McClatchy-Tribune Information Services.
By Claudia Buck
Phil Hobson, Prudential, Hobson Real Estate Group
www.hgroupdallas.com
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