Published February 10, 2012
As the class of 2011 graduated with the title of the most indebted class ever, it’s essential that grads understand the repayment process and how to shed student loan debt as quickly as possible.
A student loan grace period, or the time before payment is due, usually ranges from three to nine months depending on the loan. Federal loans (Stafford and Perkins loans) have a grace period between six and nine months before payment is expected. For the Class of 2011, that time is up.
“In a tough economy it can be a challenge for new grads to land full-time employment before, or immediately following, their college graduation,” says Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. “A grace period allows those with student loans some time to find a job and begin working and earning money before they have to start paying back their loans.”
With the typical six-month grace period over, now’s the time for recent grads to get serious about paying loans back. To help devise a plan, we talked to student loan experts about the six steps you can take towards repayment.
Be aware of your loan conditions
Whether they have federal, private or institutional loans, students need to know the terms and conditions of each type. Review loans on the National Student Loan Data System (NSLDS).
“This can help you determine which loans are the most expensive and should be paid off first,” says Haley Chitty, director of communications for the National Administration of Student Financial Aid Administrators (NASFAA).
Get to know your lenders
Students need to communicate with their lenders, they will work with students to determine the best route to repay loans, says Dave Macoubrie, spokesman for the National Student Loan Program (http://www.nslp.org/) (NSLP).
"This includes helping the student know how much is owed, the due date, and helping set up a method for repayment,” he says. “Many servicers provide a discount for students who establish an electronic method of repayment.”
Consider your budget
Although the grace period allows recent grads to secure employment and find their footing in the real world before receiving payment notices, Macoubrie explains that borrowers need to evaluate their budget to ensure that they can stay on top of their payments.
“The borrower can request the payment amount on all loans, and even discuss repayment options with the servicer before the loan comes due.”
Look into repayment options
Cash-strapped borrowers can use forbearance and/or deferment to avoid defaulting on loans. However, this will likely drive up the amount of the loan and borrowers need to research the total cost associated with these options, explains Chitty. If students extend the time it takes to repay their loan by lowering monthly payments, it can cause more interest to accrue.
“Struggling borrowers should also consider the Income Based Repayment program which limits monthly payments to a percentage of the borrower’s disposable income,” says Chitty. “Like other repayment options that extend the repayment period, this can increase the overall cost of the loan, but eligible borrowers in IBR can have the remainder of their loan forgiven after 20 years of on-time payments.”
Research consolidation options
Grads may want to consider loan consolidation, or combining their various loan amounts and interest rates into one monthly payment.
“Consolidation also may allow you to lower monthly payments by choosing a longer repayment period,” says Chitty. “With private loans, consolidation may provide an opportunity to lower the interest rate, if a borrower’s credit score has improved since they borrowed the loans.”
Students should create a payment schedule to stay on track with payments. The last thing recent grads need are penalties and potential dings on their credit history at a young age.
“If your payment is due the first week of every month, consider setting a reminder on your cell phone or computer ahead of time,” says de Baca. “If you’re repaying multiple loans, keep a spreadsheet of your payment obligations for each handy so you know what your total monthly payment and so you can track your progress.”