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Archive for Tuesday, May 19, 2009

Student loan delays increase what you pay

May 19, 2009

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The commencement speeches will soon be over. The graduation caps and gowns put away, the gift cards used.

The one thing that won’t go away is the tens of thousands of dollars graduates owe in student loans. For most college graduates, the cost of their educations will finally be a reality.

So now what?

With unemployment continuing to climb and good-paying jobs hard to find, many recent graduates will be looking for refuge from their loans.

As debts go, student loans provide more built-in options to delay repayment than any other credit obligation. Borrowers can apply for a deferment or forbearance. They can choose to extend their debt for as much as three decades or opt for graduated payments tied to how much they earn. And starting July 1, there is a new income-based repayment for federal student loans.

Graduates who suspect they will have trouble paying back their loans should immediately talk to their lenders about these options. Your choices may vary depending on whether you have a federal or private student loan.

Paying your dues

But can I give you some hard but well-meaning advice if you’re one of the many graduates saddled with student loans?

Instead of immediately opting for repayment plans that will stretch your payments out until you’re in middle age, try to find other ways to handle this debt.

I understand these are difficult times. Nonetheless start your loan repayment as soon as possible, even if it means taking on a second job, or a roommate (or two or three) or yes, dare I say, moving back home for several years.

You could handle this debt if you delay going on to graduate school, which would only pile on even more debt. If you are going to have trouble finding a job to make the monthly payments on your undergraduate debt, how in the world are you going to find employment to service tens of thousands more as a result of an advanced degree? Trust me, an advanced degree doesn’t guarantee a big salary.

You don’t get to buy a new car, an upgraded wardrobe, waste your money on liquor at happy hours, or take vacations until this debt is extinguished.

And don’t look at me with that face. Only after you’ve exhaustively scanned your budget and cut every possible expense (such as deleting the texting option on your mobile phone) should you consider extended repayment options.

Options abound

One of the most useful Web sites on repaying your student loan, if this is your last option, is www.finaid.org. Go to www.finaid.org/loans/repayment.phtml where you’ll find an explanation of various repayment plans. In this section of the site, you will also find several calculators to help you evaluate the pros and cons of the different choices.

The following are some of your repayment options under the federal loan program:

• Deferment. Under this option your loan payments can be temporarily suspended for specific situations such as unemployment or economic hardship. If you have a subsidized federal loan you don’t have to pay interest while in deferment. However, if you have an unsubsidized loan, interest keeps accruing and is capitalized if you don’t pay it.

• Forbearance. You can reduce or stop making payments for a set period of time. Interest continues to accrue.

• Graduated repayment. This plan allows low, interest-only payments followed by principal-and-interest payments for the remaining term of your loan.

• Income contingent repayment. With this option, you can decrease your monthly payment based on your gross income.

• Extended repayment. Eligible borrowers who owe more than $30,000 may be able to take as long as 25 years to repay their student loans. (You get another five years if you consolidate your loans.)

• Income-based repayment. This latest repayment option helps keep your loan payments affordable with caps based on your income and family size. There’s a sliding scale used to determine how much you can afford to pay. If you earn below 150 percent of the poverty level for your family size, your required loan payment will be zero. The income-based option is available to borrowers with loans obtained through the direct and guaranteed federal loan programs. It covers most types of federal loans made to students. It does not include loans made to parents.

There are a lot of other stipulations about this new repayment option. For more information go to www.ibrinfo.org.

I’ve met an incredible number of people — too many — who really could have paid their student loans under the standard payback period but because they didn’t want to live frugally, saw their loan balances jump significantly over the years.

If you truly can’t afford to fully pay what you owe, take advantage of the extra breathing room. But remember the more you delay, the more you may pay.

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