Odds are, when your child signed student loan documents, he or she had little understanding of the implications: One day, after graduation, all those loans, plus interest, would have to be repaid. Its not surprising, very few 18 to 21 year-olds have any idea of how to manage a household budget and how to balance spending and saving.
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Fortunately, you do. As a parent of a recent college graduate, you can help your son or daughter understand and take responsibility for college loans, figure out how to manage repayments and how to communicate with the lender and construct a budget.
Admitting, it might be tough: Newly-independent graduates dont always appreciate parental advice (unless youre offering to repay all their loans with no strings attached) so communicate with a light touch.
When talking to your graduate, here are five things to consider:
1. How much do you owe and when are payments due?
Most students take out loans from several different sources during their four (or more) years of college. Many have four different Stafford loans and there could even be a mix of private loans from different lenders at different times.
To cut through the confusion, suggest that your son or daughter use FinAid.orgs Student Loan Checklist to organize the information surrounding the loans and get a better handle on the total amount owed, monthly repayment amounts and due dates.
2. What are the repayment options?
Unlike the good old days when the repayment amount was the repayment amount, student lenders now offer multiple options for repayment. Options are always helpful, but each choice has implications for the total amount to be repaid, total interest and length of repayment that your son or daughter needs to fully understand before making a choice.
For example, the federal government offers the folllowing repayment plans, which are fairly typical of whats offered by private lenders participating in the Federal Student Aid program:
Standard Repayment: Borrowers repay a fixed monthly amount (minimum of $50) for up to 10 years or until the loans are repaid, whichever comes first.
Extended Repayment: For borrowers with at least $30,000 in loans, fixed annual or graduated repayment amounts can be extended up to 25 years.
Graduated Repayment: Borrowers make graduated payments that start out low to account for entry-level salaries and increase every two years. Repayment period cant exceed 10 years.
Income-Based Repayment: Borrowers payments are based on a formula calculated by income and family size and can be extended for up to 25 years. In some cases, balances remaining after the 25-year period may be cancelled and the debt could be forgiven. If you work in public service, the remaining balance after 10 years could be cancelled.
Income-Contingent Repayment: Borrowers make payments that are adjusted monthly based on their current adjusted gross income plus a spouses income, family size and total amount of direct student loans. Maximum repayment is 25 years, after that, any remaining amount is forgiven.
Income-Sensitive Repayment: Borrowers make payments based on annual income (which can increase or decrease as income changes), with a maximum repayment period of 10 years.
Check with the lenders to find out what options are available. If your son or daughter cant remember who the lenders are, call the college financial aid office and ask or visit FinAids lost lender page.
3. What is the best type of repayment?
There isnt a one-size fits all repayment schedule. Most lenders offer options that are based on a borrowers salary, graduated repayment plans or extended payment plans or combinations of all of the above. Extended repayment plans can roll the debt out to as long as a 25-year repayment period; keep in mind that interest charges will continue to accrue during that time, vastly increasing the overall size of the repayment.
Depending on the total amount owed, some type of extension is usually a good idea, especially if your son or daughter will be earning a modest starting salary and needs to pay other bills. Its certainly better to extend payments than default. Remember, if your college students situation changes, payments can always be made in advance to cut the size of the total bill.
4. What about loan consolidation?
Loan consolidation is a terrific idea, whether the loans are with one or many lenders. Typically, Stafford loans can be consolidated and private loans can be consolidated, but Stafford and private loans cant and shouldnt be consolidated together in one bundle. By consolidating loans, your child can manage their payments more easily and benefit from a variety of repayment plans and deferral options.
The federal governments portal for Stafford loan consolidation contains applications, frequently asked questions and contact information covering virtually every aspect of federal student loan consolidation. Interest rates for federal loan consolidation cant exceed 8.25% and are generally lower. The exact interest rate for each graduate is calculated based upon the weighted average interest rates of all the federal loans held by that individual graduate, which you can calculate here. Rates for subsidized loans are 3.4% and rates for unsubsidized loans are 6.8%.
Private consolidation, however, is a different story. Interest rates on private loans are variable based on the LIBOR or Prime Rate. For LIBOR-based loans, depending on the borrowers credit worthiness the rate of between 2 and 11% above the three-month LIBOR rate can be applied. As of Aug. 10, the three-month LIBOR was 0.28%. More information can be found on FinAids private consolidation page.
5. What are the options if your child cant make payments?
Uh-oh. Whether your son or daughter cant find a job, lost a job, is overwhelmed with debt or going to graduate school, all isnt lost if he or she is temporarily unable to repay the loan. Both private and Stafford loans offer deferments for graduate school and temporary hardships, such as unemployment or medical problems.
If your graduate fell into unemployment, dont fret. Depending on the type of loan, theres a six- to nine-month grace period after graduation or leaving school before the repayment period begins. After that, if theres a financial problem or your child will be starting graduate school, the best bet is to contact the lender and get information about the best way to proceed, which will depend on the lenders policies and the specific situation.
In the worst case, if your child has actually defaulted on loans, all is still not lost. The federal government has a default resolution website with information about resuming payments and contact information. For private lenders, contact the lender for information about what it would take to get the loan or loans out of default.
Finishing college is a great accomplishment and marks only the beginning of your childs life as an adult. By helping your child navigate their way through the student loan process, youre helping them become more financially responsible in the long run. Good luck!
Renaud Laplanche is the CEO of Lending Club. Renaud has appeared in many leading publications including Forbes, New York Times, Washington Post, USA Today and Barrons. Renaud has been featured on CNBC, ABC News and Fox Business Network. Before Lending Club, Renaud was the founder & CEO of TripleHop Technologies, an enterprise software company acquired by Oracle Corporation in June 2005.