Congrats, Grads! Now, What About Your Student Debt?
Congratulations, Class of 2016, you did it. Now, it’s time to think about all that student debt you collected.
If you graduated with a sizable pile of debt, you aren’t alone. About 69 percent of the Class of 2013 graduated with an average of $28,400 in student debt, according to a November report from the Institute for College Access and Success (TICAS).
Graduates from Pennsylvania and New Hampshire fared the worst, with an average of more than $32,000 in debt, while students from New Mexico fared the best, with an average of just $18,656 in debt.
As you embark into the “real” world of full-time employment and debt repayment, it’s important that you understand that not all debt is alike, and that you study up one last time – this time on the terms of your loans.
Here, we’ll try to walk you through some of the key differences between different types of student debt, and take a look at some important points to consider.
Federal vs. Private Loans
Identifying the type of loans you have is the first step you must take in developing a repayment plan, as the type of loan can greatly influence the number of options you have and how much you’ll have to pay over the life of the loan.
Student loans come in two broad categories. There are federal student loans, which are administered by the U.S. Department of Education, and there are private student loans, which are issued by non-government lenders, including banks, credit unions and companies like Sallie Mae.
Federal Loans In Detail
Federal student loans have strict eligibility requirements determined by the Free Application for Federal Student Aid (FAFSA). They generally have lower, fixed interest rates (Federal Direct loans dispersed to undergraduates over the past year carried a 4.66% rate), require no credit check or cosigner, and defer repayment until after you graduate (or after you drop below half time).
For students who demonstrate financial need, some loans are subsidized, meaning that the student isn’t charged a cent of interest until after they graduate (or, again, drop below half time). Instead, the government covers, or subsidizes, the loan’s interest as it accrues until the repayment period begins.
If you take out an unsubsidized federal student loan, you can choose to pay the interest as it accrues or allow it to be capitalized. This means the interest is rolled into the principal balance, which adds to your overall debt. But remember, capitalization can be costly in the long run, because when you begin repaying the loan, you start out with a higher principal balance—and you wind up paying more in interest over the life of the loan.
There is also the Federal Perkins Loan Program, which is available to both undergraduate and graduate borrowers. Perkins Loans can be offered to students to further supplement a financial aid package. With Perkins Loans, your school is the lender, rather than the government.
Federal loans offer income-based repayment plans, cancellation for certain employment, including taking certain government jobs, and deferment if a graduate returns to school.
While federal loans have many benefits, but they also have their limits. Congress sets a cap on how much federal debt a student can received, with the cap varying based factors including whether you are an undergraduate or graduate student and your year in school.
Private Loans Explained
Private loans, on the other hand, don’t require don’t require a student to demonstrate financial need and aren’t capped, but that trade off comes at a price.
Whereas federal loan interest rates are fixed, private loans often charge variable interest rates that are typically higher than those available for federal loans. Also, private loan origination and disbursement fees can be high.
Like unsubsidized federal loans, private loans accrue interest from the time it is dispersed. If that interest isn’t paid regularly, than it is capitalized during the years the student is in school.
Repayment options tend to be more limited and less flexible. For example, you might not be able to defer payment on a private loan if you decide to go to graduate school, and you might not be able to gradually build your monthly payment amount based on your income.
And finally, private loans usually require a credit check and for a parent to co-sign a loan in a student’s name.
Know Your Grace Period
Whether your loan is federal or private, it is important to understand when you are expected to begin repaying it.
For federal student loans, you will typically have a grace period of six to nine months after graduation, depending on the type of loan. Private loans can vary greatly, with some lenders expecting repayment immediately after you graduate or drop below half-time status.
A grace period gives graduates a chance to get their feet under them, but they can also offer opportunity to a diligent graduate with subsidized loans. If you begin repayment on a subsidized loan early, before your grace period ends, you might even be able to pay off one or more of your loans before interest even starts to accrue.
But missing your first payment can have severe consequences and impact your future ability to take out debt, be it in the form of a credit card or a mortgage.
Know Your Servicer
To make your first payment, you need to know not only when it is due, but also to whom you are making the payment.
Your loan might have a loan servicer, which is a company that handles the billing and other services of your loan on behalf of the lender. If your loan has a servicer, the servicer will be the one sending you your monthly bills.
It’s also important that you keep your address updated with your lender and your servicer. You might be moving to a new city to start a new job, but you don’t want to miss out on important communications about your loans.
Know How You Can Save
As you begin repayment, you might also want to look into how you can save on your interest.
Some loans, such as Federal Direct loans, give graduates a 0.25 percent interest rate reduction if the borrower signs up for automatic payments, meaning that the servicer automatically deducts a set payment amount from the borrower’s bank account every month.
And paying ahead, if you have the financial means, can lower the amount of interest you have to pay over the life of the loan. It can also help give you a cushion in the event you lose your job or for so