By Lynn O’Shaughnessy
For new college graduates who borrowed to help pay for their bachelor’s degrees, the clock is ticking. These grads have six months before the federal government expects them to start repaying their student loans. Here are seven tips to make sure that these young borrowers avoid any trouble as they begin paying down their debt:
1. Identify outstanding loans
The first step for borrowers is to know what they’ve borrowed. Debtors can access all their federal loans by logging into the National Student Loan Data System. Keeping track of these loans can be harder than you think. Students could have eight federal loans (one for every semester) or more after graduating from college.
2. Consider the federal repayment options.
There are a variety of ways to repay student debt. The standard method is to make monthly payments over 10 years. Borrowers, however, can be eligible for other repayments plans. The graduated repayment option requires lower payments in the early years with the payments usually growing every two years. Individuals who have borrowed at least $30,000 can qualify for an extended repayment plan, which will stretch the payments to 25 years.
3. Check eligibility for income-based repayment.
One of the big benefits of borrowing through federal student loans is that the federal government provides a safety net for those whose salaries can’t realistically cover their debt obligations. Eligible borrowers can essentially repay their student loans based on what they are making rather than what they owe. These programs can be a godsend for students who graduate without a job or are underemployed.
Pay As You Earn is the newest repayment program and the one with the most favorable terms. Under the plan, participants pay no more than 10 percent of their discretionary income each month to cover their student loans. The federal government will forgive any debt still remaining after 20 years.
Keep in mind that these repayment programs won’t always be the cheapest solution because the interest keeps accruing throughout the repayment period. If a person loses eligibility for the plan by earning a higher salary, he or she could end up paying more over the life of the loan.
4. Use the Repayment Estimator
It can be confusing for individuals when faced with various repayment options. Before choosing, borrowers should use the federal Repayment Estimator to see which would be the ideal plan for them. The estimator will calculate a person’s monthly payments and the potential lifetime cost of the loans.
5. Check out the loan forgiveness program.
Individuals should also check to see if they might qualify for the federal public service loan forgiveness program. Americans who work for a government entity or a nonprofit can have their loans forgiven after 10 years of payments. Those eligible for the program work in such fields as public education, public libraries, law enforcement, public interest law, early childhood education and public health services.
Borrowers can find out if they are eligible for this loan forgiveness program by completing the Employment Certification form on the U.S. Department of Education’s website.
6. Repay loans automatically.
The best way to avoid missing payments is to make them automatic.
7. Consider emergency options.
With all the safety nets, there is no reason for troubled debtors to just stop paying. It can lead to tough late fees and ultimately default, which will ruin a person’s credit score and can lead to wage garnishments. Defaulting can also shrink the chances of getting an apartment, obtaining a cell phone plan and even finding a job.
To avoid default, borrowers should explore requesting a deferment or a forbearance from their loan servicer.
A second, less desirable alternative is obtaining a forbearance that allows a person to stop or shrink payments for up to a year. The borrower is responsible for all interest that accrues during this period.