How to Manage Your Student Loans

As someone who has gone to college twice (thanks to a last-minute decision to attend grad school), I’ve amassed a pretty hefty amount of student loans. These loans are a mishmash of subsidized and unsubsidized federal and private loans that have one thing in common: they need to be paid off. Luckily, I was well versed in the art of managing student loans as an undergrad; making a handful of smart money moves then has made these loans manageable now. The secret? Stay informed and don’t wait until graduation to figure out how you’re going to pay everything back.

According to the Project on Student Debt, a nonprofit advocacy group, nearly two-thirds of students leave college with student loan debt. With college costs on the rise, many students graduate with more than $20,000 in loans and credit card debt and others may even find themselves with debt reaching six figures. The amount of debt can get worse if students don’t know how to handle it from the outset. Here’s how to make the right moves:

Plan from the Outset
Starting from your freshmen year, every time you take out a student loan, you should be aware of what the loan terms are, how long the grace period is, and whether or not these loans are subsidized or unsubsidized. Taking out the right student loans while you’re in college will make the repayment process immensely easier. Knowing what the terms are from the get-go will also help you plan ahead and be more conscious of what you can spend during the school year. Senior year is the time to get everything organized in preparation for the repayment process. By then, you should have taken out all the loans you’ll have needed for school and should have a good sense of how much you’ll owe once you’ve graduated.
The best loans to get are federal student loans because they have much more favorable terms than private loans, including lower interest rates and better repayment plans. There are three types of federal loans available to undergrads:

Federal Stafford loan: The most common of the federal loans, Stafford loans disbursed after July 1, 2006 have a fixed, low interest rate.
Federal Perkins loan: Students with exceptional financial need are offered low-interest Perkins loans, generally carrying a rate of five percent.
Federal Parent Plus loan: A loan offered to parents of undergraduates to help cover the entire cost of their child’s education. Remember, this is a loan your parents – and not you – have to take out, so make sure your parents are on board before looking into a Plus loan.

Students can find out if they are eligible for these loans by filling out a Free Application for Federal Student Aid (FAFSA).

If you can’t secure enough federal loans to cover your educational costs, look into taking out a private loan. Private loans are not ideal because the terms can be relatively unfavorable — most are unsubsidized and have higher interest rates. Although private loans are not ideal, they can be better than other lines of credit, so don’t write them off.

Be Organized
During your senior year, make a list of all the loans you’ll have to pay off once you’re through with school, including credit card debt and any other costs you may have incurred while in college. This will help you prioritize your debts and will let you evaluate which of your balances have the highest interest rates. Generally, private loans and credit card balances will have the highest rates, so focus your energy on eliminating these debts first while making the minimum payments on your other balances. This is the most efficient way to tackle your financial obligations and will save you tons of money in the long run.
“Another way to save money is to stay in communication with the lenders,” said Robert Shireman, Executive Director of the Project on Student Debt. “What will often happen is that students will miss a payment because they change their address after graduation without telling the lender. When students miss payments, they lose eligibility for possible benefits given to borrowers that make their payments on time.”

Decide if You Need to Consolidate
Once you’ve tossed your cap and received your diploma, you’ll notice a barrage of letters coming from various lenders badgering you to consolidate your federal student loans. Consolidation means taking all your federal student loans and combining them into one big loan under one lender.

Consolidating can make paying back federal loans easier because you only have to make one payment to one lender each month. Even so, if you do have multiple federal loans, you will generally be able to work out a system that will let you pay all of them in one bill each month. One easy way to do this is by going on to the Federal Student Loan Servicing site and enrolling in their electronic service. Once you’ve enrolled, you can make online payments, view your payment history, and change your billing options.

According to Shireman, there are fewer reasons than there used to be to consolidate your federal loans. This is because in 2005, Congress set a fixed rate for Stafford and PLUS loans. Consolidating to get a fixed rate with a lender is no longer beneficial because the government’s fixed interest rate is slightly lower than the consolidation rates. Fixed rate loans have an interest rate that will remain the same for the loan’s entire lifetime — until the loan is paid off. Shireman recommends consolidation only if you have any student loans that existed prior to July 2006, because these loans have variable interest rates that could be lowered if you choose to consolidate under a fixed rate.

With this in mind, the easiest way to figure out whether or not you should consolidate is to pay attention to your loans’ interest rates. Are they variable or fixed? If they’re variable, look into consolidation. If they’re fixed, you might not want to consolidate. You should generally wait until July 1 if you do consolidate because that’s when the rates for student loans with variable interests reset. On July 1, 2008, borrowers with variable-rate Stafford loans saw their interest rate drop from 7.22 percent to 4.21 percent. Remember, doing a little research can save you a lot of money in the long run!

Devise a Repayment Plan
It’s a good idea to let lenders know what your income will be and to ask them to match that income with a repayment plan you can handle. Lenders can also tell you about additional repayment plans that are available or give you suggestions for the best way to pay off a particular loan in relation to your other debts. When times are tough, opting for an extended repayment plan will allow you to make smaller monthly payments; the tradeoff is that you’ll have to pay more over the entire life of the loan.

The best way to take advantage of extended repayment plans is to use them to pay off other debts faster – especially those that come with higher interest rates. These plans can also help you reserve scarce funds for other costs, such as medical bills or car payments.

“Remember that you can always change your repayment option if you get into a better situation – there’s no penalty for early repayment on either federal or private loans through Sallie Mae – and talk to your lender if you end up in a difficult situation,” said Erika Eriksdotter, a corporate communications representative for Sallie Mae, a college student loan company.

Avoid Mistakes
“The biggest mistake you can make is not paying attention to your loans and having a lender track you down,” said Shireman. “This has a negative effect on your credit report and if you ignore your debt and end up in default, it’s terrible. Some employers look at your credit report as a way to look for responsible people and it doesn’t look very good to have not paid your loans.”

Rather than doing your best to ignore your debt, talk to your lenders if you’re having difficulty making payments. Lenders are willing to work with borrowers who have financial difficulties, and the federal aid ombudsman and other assistance may be available as well. You can also work with your lenders to defer your payments or ask for a forbearance to postpone payments. This will allow you to maintain your credit record while you get back on your feet.

Eriksdotter recommends getting a copy of your credit report every year to review it for inaccuracies. “Adverse information on your credit report may result in higher interest rates when you buy a car or house or make any other purchase on credit,” Eriksdotter said in an e-mail.

Stay Informed
Student aid advocates are always working to find ways to lessen the student loan burden, so it’s important to keep abreast of information that affects loan borrowers. One recent development is the Income Based Repayment (IBR) program, which was signed into law in September 2007 as part of the College Cost Reduction and Access Act. The program’s purpose is to ensure that students who take out loans for college do not later find themselves unable to pursue careers in public service, raise a family, or save for retirement.

IBR will not be available to borrowers until July 1, 2009, but when it is implemented, the program is expected to cap student loan payments at a reasonable percentage of income. This means that grads with lower-paying jobs, many of which are in the public sector, will make monthly payments in line with their income. The program also ensures that there is a light at the end of the tunnel for borrowers: after 25 years, most remaining balances will be forgiven. Those in public service careers can have their remaining debts forgiven after 10 years under the public service loan forgiveness program.

Other loan forgiveness programs are available for borrowers who perform volunteer work or military service, teach or practice medicine in certain communities, or meet other specified criteria. If borrowers do meet these criteria, the federal government will cancel all or part of an educational loan. Examples of borrowers who would benefit from loan forgiveness include AmeriCorps and Peace Corps volunteers, students in the Army National Guard, and some borrowers pursuing careers in occupational and physical therapy.

Hang in There!
Having to pay off your student loans shouldn’t be a heavy burden. Remember, 75 percent of your peers are going through the same thing. If you make the right decisions from the beginning and prioritize your debts, you should still have some leftover funds to allow you have a decent social life. You can still save for retirement, a nice vacation, or a personal indulgence. Have some fun, keep at it, and pretty soon those monthly payments will disappear and you can move on with your life.