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Personal Finance

Congrats, Grads! Now It's Time To Think About That Debt

Graduation cap on money ©

Congratulations, Class of 2018, you did it! Now, it's time to think about all that student debt you amassed.

If you graduated with a sizable pile of debt, you aren't alone. About 44 million Americans owe over $1.48 trillion in student loan debt. And the average student loan debt for the Class of 2017 was $39,400, according to Student Loan Hero.

About 44 million Americans
owe over $1.48 trillion in
student loan debt. And the
average student loan debt
for the Class of 2017 was

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, so you will have to set your priorities when it comes to spending and paying down your debts.

To help you get started, we'll walk you through some of the key differences between 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 toward 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

Many in the graduating class of 2018 took out federal student loans. These loans have strict eligibility requirements determined by the Free Application for Federal Student Aid (FAFSA). They generally have lower, fixed interest rates than private loans (Federal Direct loans dispersed to undergraduates over the past year carried a 4.45 percent rate), but you can only borrow so much under federal loan programs. For example, a dependent, undergraduate student is capped at a total of $31,000 in federal loans. But you also don't need a credit check or a cosigners for most federal student loans.

Federal loans offer some important benefits, including income-based repayment plans; cancellation for certain employment, including taking certain government jobs; and deferment if you return to school. They also offer a 0.25 percent interest rate deduction if you set up automatic payments.

Say you graduated with $31,000 in federal loan debt, the current aggregate federal loan limit, at an average interest rate of 4.45 percent interest. Over 10 years, you'd pay a total of $7,464 in interest. With that 0.25 percent deduction, you could cut that to $7,018—for a savings of $446, or the equivalent of about a payment and a half.

Private Loans Explained

Graduates who enter the working world with private loans need to pay especially close attention to the terms of their loan. Private loans 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. 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.

Each originator will have its own terms, so be sure to read up on your exact interest rate and repayment options.

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.

Grace periods give 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.

Private Loan Refinancing

As you begin repayment, you might want to look into student loan consolidation and refinancing, particularly if you have high interest rate private debt. If you have good credit, you may be able to get a lower rate on your loans than the one you received upon origination.

Consolidation is not for everyone, though. Federal loan holders, in particular, will want to think twice. If you refinance federal loans, you'll lose access to some of their key features, including public service forgiveness or deferment, as these programs don't typically transfer to private, refinanced loans.

Before making any decision, you'll want to carefully consider your old and new rates—plus any fees that may come along with the consolidation. Carefully compare the payoff amount—the total amount you'll owe, including interest, as a longer pay off period could end up costing you far more.