5 Things You Need To Do With Your Student Loans Right Now

Maggie McGrath , Forbes Staff

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Congrats, Class of 2013! Not only have you graduated, you have survived four months in the real world (assuming you graduated in May). The transition can be overwhelming, between looking for a job, possibly starting a job, moving into a non-campus dwelling and realizing that dealing with the cable company can be more hassle than it’s worth. And now on top of all of that, there is the looming threat of student loan payments. (There is also the looming threat of a government shutdown, but the Office of Federal Student aid announced on Monday that it anticipates a “limited” impact to the federal student aid application process, loan disbursements or loan repayment processes.)

When you graduate with student loans (or leave school without a degree), you are automatically granted a six-month grace period before monthly payments begin. Depending on your graduation date, that means you have a month or two left before you must start paying back.  And if you’re like many student borrowers, you may be depending on your loan issuers to contact you and tell you when they want your money, rather than proactively planning for it. That could be a mistake.  Not only is it better to know what you owe and to what’s coming down the pike, but there’s always a chance that some lender doesn’t have your current address. The fact that you didn’t get a notice doesn’t relieve you from the obligation to start paying back.  So it’s time to put down the pumpkin spice latte and start coming up with a repayment plan.

But just like crash dieting, if you do too much too soon, you’ll give up. Here are five manageable steps you can easily accomplish between now and November:

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1. Get organized.

“I think that one of the first tips every borrower should understand is how to get a clear inventory of their student loans. Many of us have a lot of kinds of student loans. It can be confusing to remember who you’re supposed to be dealing with,” says Heather Jarvis, a public interest lawyer and student loan expert. For a handy list of all your guaranteed loans (that includes “direct loans” from Uncle Sam and the guaranteed student loans that were made by private lenders through June 2010) go to http://www.nslds.ed.gov/and enter your social security number, your birthday, the first two letters of your last name, and your student loan four-digit PIN. This last piece of information might be the trickiest bit, because this is the federally-issued PIN that you (or your parents) used every year when you completed the FAFSA form that determined your eligibility for federal student aid, including loans. So the last time your family likely needed the PIN was in early 2012, when you filled out the application for your senior year. If a search through your financial records doesn’t unearth your PIN, you can request a duplicate copy here. It should come via email within a day.

What about private nonguaranteed loans? To make sure you know about them all, Jarvis recommends pulling a copy of your credit report, which you can do for free at AnnualCreditReport.com.

Once you’ve gathered all the data, make a list containing the name of each lender, the lender’s website, your log-in information, the balance and the interest rate on the loan. That last metric will be helpful later if you decide to consolidate your loans or decide to pay off higher interest date early. Even if you don’t have private (non-government guaranteed) bank loans, this can get pretty complicated since government backed loans come in three varieties. “You could have a subsidized loan, unsubsidized, or a Grad Plus—those three loans have different interest rates,” notes Rick Ross, co-founder of fee-only financial advisory College Financing Group.  (Just to complicate matters, the rate on subsidized loans has changed nearly every year. A table is here.)

 

2. Learn about alternate repayment options (and figure out which, if any, is right for you).

The standard repayment schedule extends your loan payments over ten years, or 120 payments. However, if the standard monthly payments aren’t manageable on your budget – or if you’re unemployed or otherwise unable to repay your loans – the federal government has some alternative repayment plans for you, as well as some deferral options.  The primary repayment options: Income-Based Repayment (IBR), Income-Contingent Repayment (ICR) and Pay-As-You-Earn. Each program caps your monthly payment at a fixed percentage of your income and extends the repayment period beyond ten years, but there are some important differences.

IBR and ICR extend the payment period to 25 years, while Pay-As-You-Earn is a 20-year repayment period. The monthly payments under ICR are calculated based upon your adjusted gross income, family size, and overall amount of Federal Direct loans. IBR caps monthly payments to 15% of your discretionary income (which is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state of residence), and Pay-As-You-Earn caps monthly payments at 10% of discretionary income. But the most important difference between the three is this: Pay-As-You-Earn is only available to people who were new borrowers on or after October 1, 2007 and who have received a loan disbursement on or after October 1, 2011. In short: Class of 2011 and earlier, you likely won’t qualify.

“One reason to be cautious,” notes Jarvis, “is they let you pay very little, but it can mean higher interest costs over time.” However, Jarvis adds, you can always pay more than you owe if it’s to your advantage.

Finally, it’s worth noting that if you work in a full-time public service job, you may qualify for loan forgiveness on Federal Direct loans after just 10 years of on-time payments. The Federal Direct distinction is key here: loans made under Federal Family Educational Loan Program or the Perkins Loan program are not available for public service forgiveness. If you have a Federal Direct loan and work for a federal, state, or local government agency, entity, or organization or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS), you very well may qualify to have your loans forgiven after 10 years – but to find out for sure, head here.

According to recent figures released by the government, just 1.6 million borrowers are in an income-linked debt relief program, but many of the 600,000 borrowers who defaulted on their loans in the last fiscal year could have qualified and possibly avoided default. As a result, the Department of Education has announced that starting in October, it will contact borrowers who are struggling to repay their loans to make sure they know all the repayment options that are available to them.

 

3. Figure out how much you can pay. And remember: “can pay” is different than “want to pay.”  Student loans are virtually impossible to discharge in bankruptcy (you have to prove “undue hardship”), and there are enough federal options to help with repayment that you don’t need to let the balance sit accruing interest in deferment and forbearance.

“One of the mistakes people are making is asking for and getting forbearance on loans rather than choosing income-based repayments. I think it’s understandable because programs are so confusing and it requires a lot of paperwork including income verification, but it’s not so complicated that it can’t be figured out,” Jarvis says.

Ross agrees with this. “I think what you start with is affordability. Let’s say you have $80k in student loan debt right now and can’t make the monthly payment. What I’m going to do is consolidate my loan and I’m going to put them in a federal direct loan consolidation,” he says, noting that consolidation can save you money (and turn the repayment process into one payment to one source rather than several different payments to different servicers). However, you cannot consolidate private loans with federal loans, and when you do consolidate federal loans, you may lose benefits associated with the original loan, like interest rate discounts, principal rebates or some loan cancellation benefits.

Ultimately, Ross says, the choice between the various repayment options will come down to what’s right for your budget. “There’s no cost to the borrower to switch options,” he says. (Except for consolidation – once loans are consolidated they cannot be un-consolidated.) “If IBR fits your budget today and next year you get a job that pays an extra $10,000 per year, [then] get into standard repayment because it shortens the term to 10 years and is the least expensive to pay off.”

Ross noted that the one scenario in which IBR and its fellow programs get expensive is when people put the payments on auto-pay and then fail to supply the government with the annual income information that keeps them enrolled in these programs.

“When students are on income-based repayment, every year the government asks them to supply income information in order to adjust the payment. If they’re not on time [in supplying the information], the servicer will put them back into standard repayment. Payments could go from $100 to $500 per month,” Ross says. “Typically these students are signed up for autodebit, and you can imagine the problems these cause. ‘I’m overdrawn, why am I overdrawn?’”

Once borrowers supply the income information, they can get back on the extended repayment plan in 30 to 60 days –but that means one to two monthly payments in the “full” amount, which could be a significant financial hit depending on the loan balance and the person’s income.

 

4. Even if you don’t like what you’ve learned in steps 1 through 3: Don’t ignore it.

“I’d say the most harmful mistake is that some folks are so nervous that they don’t address it head-on,” Jarvis says. “Federal student loans are so flexible that there’s always something you can do to make things better. The worst thing someone can do is ignore them. I continue to be shocked by how many people are delinquent or in default.  And that’s just not smart.”

She added, “I would say federal student loans are one of the highest priority debts any of us will ever have. There is no statute of limitations. The government can and will pursue people to the grave. [If you don’t pay] they can garnish wages, they can intercept federal benefits and some portions of social security. And they do.”

5. Forget about the quick or easy fix.

While both Ross and Jarvis highlighted websites that can help track your loans and give you information to help manage them – studentloans.gov and tuition.io are two particularly good ones – there’s no website that will make your outstanding balance magically disappear, nor any Kickstarter campaign that will raise funds for your student loan debt. You just have to patiently chip away at the debt, and be wary of anything that promises otherwise.

“There’s a lot of websites popping up to make money off of people who are vulnerable,” Jarvis says. “Be careful, because there are some companies who will say, ‘We can slash your monthly payments!’ and try to look like a government agency. I think people need to be pretty cautious. Everyone is interested in student loans now.”