About six months ago, graduation season began. College seniors and graduate students went through several rites of passage, like getting their caps and gowns, handing in their theses and going to the financial aid office to undergo student loan exit counseling. Students partaking in the latter activity were told that on graduation day, they would not only receive diplomas but also a ticking time bomb: Their student loan grace period would expire in several months, and they’d need to start repaying their debt.
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Most people who finance their educations take out federal student loans, many of which don’t immediately need to be repaid after they’re disbursed: Subsidized and unsubsidized Stafford Loans have a six-month grace period, and Perkins Loans have a nine-month grace period. (PLUS Loans do not have a grace period.)
If you’re coming up on repayment and think you might not be able to afford your loans, don’t wait to figure out a game plan.
“A lot of the young adults we deal with are often bitter about the situation that they’re in,” said Andrew Josuweit CEO and co-founder of Studentloanhero.com. “They may not have gotten the job they thought they’d be getting or the income. … A lot of them are having trouble making those payments.”
Federal student loan borrowers have a lot of options at their disposal, so you should be able to find a way to stay financially afloat while meeting your debt obligations.
Connect With Your Servicer
When your student loan was disbursed, you received a notification from your student loan servicer. Ideally, you’ve already set up an online account with your servicer (perhaps you’ve even started paying your loan interest), but if not, now is the time to do it. Your loan may have switched servicers between the time it was disbursed and now, so check the National Student Loan Data System for this information. You’ll need your financial aid PIN, and you can get a new one if you’ve lost track of yours.
Once you’ve logged into your accounts, take note of your monthly payments, and create a plan for making them (if you haven’t yet). Establishing an automatic payment may help you stay on schedule. Set reminders to make sure the payment came out of your account as planned, especially after the first one. Pay extra close attention when you start this process — you don’t want to pay late fees or become delinquent on the loan.
Figure Out Your Budget
Now that you know how much you owe, take that amount out of your monthly paycheck — whatever you have left is what you can divvy up into saving and spending categories (do yourself a favor and start saving early).
After doing this, you may find your current lifestyle to be too expensive to sustain. Think of everything that’s adjustable in your budget, like rent, food and entertainment, and start trimming. If you’re already spread thin, see if you can reduce your student loan payments.
Explore Your Options
First of all, if you’re returning to school or entering active military duty before the end of your grace period, your grace period will be extended. If you consolidate your student loans during your grace period, you begin repayment about two months after the Direct Consolidation Loan is paid out.
If none of the above applies to you, start looking at different payment plans available through the Department of Education, which can help you work out more affordable monthly payments. You may end up paying more in interest over the life of the loan, but it’s crucial to make these loans affordable from the beginning.
Forbearance and deferment may also be an option, depending on your circumstances. You should also check to see if your line of work qualifies you for student loan forgiveness programs. No matter your situation, if you have federal student loans, you should be able to work something out to avoid defaulting on your loans. Still, the federal student loan default rate was 13.7% last year, which seems to indicate consumers may not be aware of the options available to them.
“Essentially every federal student loan borrower is eligible,” Josuweit said. “You just have to talk to your servicer.”
If you have private loans, you’ll have less flexibility, so Josuweit recommends reducing your federal loan payments as much as possible so you can stay current on all your loans. Defaulting will only make your situation more difficult, which Josuweit knows from experience.
“I defaulted on my student loans a few years ago,” he said, noting that it killed his credit score. “I can’t refinance my student loans.”
If you stay on top of your loan obligations, your education debt could actually help you build credit and open up refinancing options in the future. Take extra care to make sure all your loan payments reach your account on time and that your payment history has accurately been reported to the credit bureaus. Make a habit of getting your free annual credit reports and reviewing your credit scores every month — you can get two credit scores for free on Credit.com.
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Christine DiGangi covers personal finance for Credit.com. Previously, she managed communications for the Society of Professional Journalists, served as a copy editor of The New York Times News Service and worked as a reporter for the Oregonian and the News & Record. More by Christine DiGangi