The most frequent question I get from soon-to-be or recent college graduates is this: "Is there anything I can do about my student loans?"
Each time I give them the same answer: Pay them. And on time.
I suspect that many students asking me that question are really hoping there is some way they can avoid paying at least some of the thousands of dollars in loans.
With the rising cost of a college education, the average student graduates with $17,000 in debt. The average Federal Family Education Consolidation Loan borrower has a debt of about $29,000, according to the College Loan Corp., a leading national student loan company.
Understandably, it's a daunting task to have to start your working life with so much debt. It seems unfair. You go to college to get a good job, only to have to devote a sizable chunk of your paychecks to pay off college loans.
"Often when students take out these loans they aren't focused on how they are going to pay them back," said Mahnaz Mahdavi, director of the Women & Financial Independence program at Smith College in Northampton, Mass. "But now that they are seniors, they are very interested."
Instead of panicking, you need to investigate your repayment options.
For example, here are some choices offered by Nellie Mae, a top originator of student loans:
Standard Repayment. You pay your loan as planned for up to 10 years depending on the loan amount. It's standard practice that borrowers with student loans are given a six-month grace period following graduation before payments begin. During this time, interest will continue to accrue but at a lower rate.
Graduated Repayment. This plan provides short-term payment relief through low, interest-only payments for up to four years, followed by principal and interest payments for the remaining term of the loan. The initial interest-only payments can be more than 40 percent lower than payments borrowers would make under a standard repayment plan.
Income-Sensitive Repayment. With this option, borrowers can increase or decrease their monthly payment amount based on their current income and the loan amount. Individuals facing financial challenges can choose this plan and select a monthly payment amount that is between 4 percent and 25 percent of their gross monthly income. However, each payment must cover at least the monthly interest.
Here are some other things to consider:
Look for a lower interest rate and try to consolidate. On July 1, the federal government will be recalculating rates on student loans. The interest rate on student loans issued after July 1998 will likely fall between 3.5 percent and 4.125 percent, according to Mark Brenner, general counsel with College Loan Corp. So a borrower that consolidates $17,000 in loans could save more than $3,000 over 10 years. "For recent college graduates this could be their best opportunity to lock in a low fixed interest rate," Brenner said. Contact the Federal Direct Consolidation Loans Information Center at (800) 557-7392 or visit www.loanconsolidation.ed.gov to find if you are eligible to consolidate.
Nellie Mae and other lenders offer borrowers a chance to reduce their interest rate by 2 percent after making their first 48 scheduled monthly payments on time. In addition, many lenders will reduce the interest rate, usually by a quarter of a percentage point, if you allow them to automatically deduct payments from a bank account.
Whatever repayment option you choose, keep in mind you did get something valuable for that borrowed money. As overwhelming as your debt may be, you have to honor your obligations as best you can.