Graduating from college, students find themselves trading in the burden of balancing an impressive GPA, social life, and perhaps a job with the burden of balancing their college debt.
While this is obviously a stressful experience, experts say that learning a little about the process can ease the tension.
Basically, there are only a handful of things anyone needs to know about dealing with college debt. According to Reyna Gobel, the author of AudioGO’s “How Smart Students Pay For School: The Best Way to Save For College, Get the Right Loans and Repay College Debt,” it might be easier than you think:
1. Use the grace period
Not all loans have a generous grace period, but make sure you take advantage of those that do. Many federal loans offer at least six months (the federal Stafford loan) or nine months (the federal Perkins loan) before you have to start paying anything back.
This not only gives you time to look for work and save money, but it also gives you time to formulate a strategy for repayment.
2. Use all the tools available
Many experts will tell you that your grace period is also a time to scrutinize your payment options by using things like online student loan calculators to see how all of the repayment plans available to you will work out.
For example, you may find that you can afford a higher monthly payment that will save you hundreds or even thousands of dollars every year. Of course, a higher installment also means that you pay the loan off sooner.
Also, as you examine different payment plans you can pocket or put any extra money into a savings account that will likely come in quite handy over the next couple of years.
3. Consider all your options
Gobel estimates that it takes the average student ten years to pay off a federal student loan with at least a $50 a month payment. However, this is only appropriate for students who are able to find a job with an annual starting salary that is lower than their total student loan, college debt.
Mark Kantrowitz, publisher of FinAid.org says that
if your debt exceeds your annual income, you’re going to struggle to repay the loan.
This is when it is important to look at all of your options. This includes things like forebearance, income-based payment reduction, repayment extension, and more.
4. Understand what consolidation means
For most people, the concept of consolidating your debts makes a lot of sense but it is not always the best thing. In terms of student loans, consolidation best serves debtors who:
a) Want an income-based reduction that isn’t offered by their lender
b) Want to expedite the removal of a co-signer
c) May be juggling too many payments
Keeping your loans separate, though, has its benefits according to Kantrowitz, who says
paying down several loans at once allows you to accelerate your repayment.
This results in paying them off sooner.
5. Make smart payments
Have a plan for what you want to pay and how quickly you want to pay it off. More than likely you will have to stretch your dollars so:
a) Strategize your debt spending (limit credit cards and other loans if possible)
b) Pay extra whenever you can
c) Find ways to trim spending (like getting a cheaper phone plan, etc)
d) Avoid forbearance and deferment unless absolutely necessary because they continue to accrue interest
6. Have an escape plan
Basically, there are two contingencies that the federal government provides so that you do not get in way over your head:
a) Income-based repayment will reduce your monthly payment to a percentage of your limited income
b) Volunteering for certain programs (like AmeriCorps) can help reduce some of your total college debt
7. Do not default
While this should be obvious defaulting on your student loans will always hurt you in the end. You cannot claim bankruptcy on them so if you avoid them for too long you could have to sacrifice your tax returns or you could have your wages garnished, which always costs more than income-based repayment