Updated: May 3, 2013 12:14PM
Originally published: August 7, 2001
You’ve graduated. Congratulations! Now it’s time to start repaying those student loans. You’re not alone with that burden of student loan debt--an average of $15,700 for college grads. But it’s your responsibility to work out a repayment plan. Here’s how to get started.
There’s a six-month grace period after graduation before your first payment is due. Start now to consider the repayment option that makes the most sense for you. That amount, of course, depends on your starting salary and living expenses as you take your first job. So it’s time to confront that dreaded word: budget. Once you’ve figured out your income and living costs, you’ll be in a better position to know how large a monthly loan payment you can afford.
You’ll be faced with a choice of repayment plans that can extend the life of your loan while reducing monthly payments to the level you’ll find affordable. But the idea is to structure as large a loan payment as affordable, without over-stressing your budget. The sooner you pay down that loan, the more interest you’ll save--and the more money you can set aside for future goals, such as a down payment on a home. Experts suggest that student loan payments should not exceed 8 percent to 10 percent of your monthly gross income.
Many students figure they want to make small student loan payments, because the interest is typically lower than credit card debt, and because student loan interest is deductible up to certain income limits ($65,000 for singles; $135,000 for couples). Certainly, if you have higher-rate credit card debt, those repayments should be a top priority. And you’ll want to start investing in your company 401(k) plan, or an Individual Retirement Account, as soon as you start working. But don’t overlook the importance of making regular payments on your student loan. Those payments are reported and become part of your credit history.
Add up your loans
You may be surprised at the amount of student loan debt you’ve accumulated. Don’t forget that for unsubsidized loans, the interest has been building while you were in school. (Federally subsidized loans don’t start accruing interest until after graduation.) If you’re not sure how much you owe, go online to www.loanlocator.org . It’s a free service of the National Student Loan Clearinghouse, and it will help you search out all your loans, and current balances, from different lenders. You’ll need to enter your Social Security number and date of birth to start the tracking process.
The next step is to use a student loan repayment calculator to consider the impact of alternative repayment plans. Check in at www.wiredscholar.com or www.usafunds.org to figure out what your monthly payments would be, depending on your choice of repayment terms. The standard monthly payment is a straight 10-year repayment plan. About 90 percent of borrowers use this program. But if that creates too large a monthly burden, you might consider one of the approved alternatives.
There are programs that allow for gradually increasing payments, as your salary increases. Others set your repayment based on your income, and extend the repayment period. Of course, this adds to the interest burden you will pay along the way. If you have more than $7,500 in loans you’ll probably benefit by consolidating your loans into one easy monthly payment. Consolidated loans can also be stretched out for more than 10 years. Be careful not to consolidate very low-interest special loans into a package with a higher interest rate.
Extra repayment savings
And here’s one more tip. You can lower your loan interest by one quarter of a percentage point if you agree to have that monthly payment automatically debited from your checking account. And once you establish a four-year record of on-time repayments, you may be eligible for a further reduction in interest rates. By the way, if you run into temporary financial problems and cannot make your scheduled payment, contact the lender and ask for a deferment or forbearance. That will forestall any consequences on your credit report.
Don’t be overwhelmed by the burden of debt. Just start now to make a plan that gets it out of the way as soon as possible. Your student loan was one of the best investments you could have made. The education it paid for is almost certainly guaranteed to increase your lifetime income many times the cost of repaying that loan. And that’s The Savage Truth.
Check in at www.TerrySavage.com to read my latest columns, connect to favorite financial Web sites, and order my books and tapes.