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How to manage student loans
It was like something out of a horror movie for Philadelphia resident Chenell Tull the day she hit the 6-month mark after graduation. The grace period on her private student loans expired, and her $45,000 in college debt suddenly swelled into $52,000 as the student loan companies took the interest that had accrued while Tull was in school and added it to the principal.
She’s now paying interest on the interest.
“I was never told about this crazy idea,” Tull says. “I would have made sure I had every penny paid off before the grace period ended.”
Today, the 28-year-old Tull has repaid more than $20,000 of her debt, and records her progress on her blog, BrightCents.com.
Some millennial grads like Tull are tackling their student loans, cutting debt and coming out ahead. Still, about 43 million borrowers with student loans collectively owe more than $1.3 trillion, according to the Consumer Financial Protection Bureau, or CFPB.
Here are some do’s and don’ts of managing student loans after graduation.
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Don’t mistake deferment for default
Deferment allows you to avoid payments on federal student loans while in school, serving in the military or while looking for that first job (although interest will still accrue on unsubsidized loans).
Forbearance works like a deferment, but interest accrues on all loans.
But default? You’ll want to avoid it, at all costs. “The majority of people who default have pushed loans under the rug and don’t want to deal with the loans,” says Jan Miller, an independent student loan consultant who typically works with professionals managing complicated student loan debt.
The Department of Education estimates that 3 million borrowers are at least 30 days past due on one or more Federal Direct Loans. After 270 days of delinquency, you go into default. This can lead to garnished wages, ruined credit and an inability to qualify for future aid or deferments. Almost 8 million student loan borrowers are in default, owing more than $110 billion, according to the CFPB.
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Do determine repayment strategy
No matter how you tackle your loans, do it with consideration. The Department of Education’s Federal Student Aid website lists 8 types of repayment plans that are available for student loan borrowers. And any millennial who works full time (defined as an annual average of 30 hours or more per week) at a public or nonprofit institution and makes 120 payments could be eligible for student loan debt forgiveness.
Idaho resident Shannon Brown, 32, and her husband paid off $22,000 in student loan debt in less than 9 months by using the “debt snowball method,” paying the loan with the lowest amount owed, regardless of interest rate.
“Paying off the smallest loan first allows you to experience success very early in your journey and is a real motivator to keep on going,” says Brown, who documents this approach on her blog, GrowingSlower.com.
Miller tailors repayment strategies to the needs of his clients, often suggesting that clients repay highest-interest loans and private loans first.
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Don’t jump into consolidation
By consolidating, you could roll all loans into one big loan, simplifying a millennial’s repayment to once monthly and at one interest rate. No more juggling of loan payments.
However, choosing consolidation limits your loan repayment strategies, such as aggressively paying private loans while keeping federal loans in forbearance, or repaying higher-interest loans first, Miller says.
“Consolidation is one of your aces in the hole, so don’t use it too soon” he says. “Once you consolidate, you can’t play around and manipulate loans as much.”
As well, if you think you may qualify for a forgiveness program, you may want to wait. “If you feel you may qualify for public student loan forgiveness, and you have already been working for a public-service-qualifying employer, consolidating may eliminate years of eligibility already established, depending on which loan types were already benefiting from the program,” Miller says.
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Do focus on paying off debt
Once you land that first post-college job, don’t start blowing cash on cars and condos.
“Start repayment immediately upon graduation and throw all your extra income toward paying off that debt,” debt blogger Brown says.
“It can be very tempting to look at your new salary as a windfall and start to increase your lifestyle,” she says. “However, if you keep living like a poor college student for just a couple more years, you’ll be financially free really fast.”
At first, Brown and her husband committed to an extra automatic payment of $39 per month, making additional payments at the end of each month when they were able.
“We were really surprised that once we made a plan to pay off our debt, it went much faster than we could have imagined,” she says.
ADVISER SEARCH: Need help navigating that debt? Find a financial adviser today.
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Don’t forget about loan co-signers
If your parents co-signed your private student loans, their credit is tied to yours. If you flake out on payments, their credit rating will get hit — not a great way to repay their generosity.
“Parents forget that they’re liable, too,” says Reyna Gobel, author of CliffsNotes titled “Graduation Debt: How to Manage Student Loans and Live Your Life.”
Sometimes parents may need to chip in to avoid the loan going into default and to save their own credit. If you’re having a problem coming up with monthly payments, talk to your parents before you miss an installment.
If possible, pay down private loans as quickly as possible and look into releasing your co-signer, Gobel says. Lenders have different rules around co-signer release, but a history of on-time payments is a critical piece of the loan puzzle.
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Do call on the ombudsman
The Federal Student Aid Ombudsman Group of the U.S. Department of Education helps resolve disputes relating to direct loans, guaranteed student loans, Perkins loans and the federal family education loan program loans.
“The federal student loan ombudsman is your secret weapon for federal student loans if your servicer is not giving you the right information or you’re facing some sort of problem,” Gobel says.
Private student loan holders can turn to the CFPB, which also can help solve problems.
“Either way, whether private or federal, there are people to give you resources and help,” she says.
Miller, the independent student loan consultant, says to be leery of debt-relief agencies, particularly those that consolidate multiple loans and dump them into income-contingent repayment programs — a one-size-fits-all approach — while charging you to do so.
If you have a complicated loan history or large loans, seek help from a financial adviser or credit union adviser for budgeting.
“The main strategic advice is basing borrowing and the repayment-plan choice on overall life plans,” writer Gobel says.
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Don’t forget to gather written proof
© Elena Elisseeva/Shutterstock.com
“It’s not a bad idea to get something in writing along with pulling all 3 of your credit reports to make sure it was reported correctly and that you’re not missing any other servicers or something who are still out there,” says Nick Best, a bankruptcy attorney in Huntington Woods, Michigan.
FREE TOOLS: Get your credit report and score today, for free and with no obligation, at myBankrate.
It’s up to you to check your credit history and ensure accuracy. The same holds true even if you’ve gone into default. Make sure the status of the student loans on your credit report matches what the government is showing at NSLDS.ed.gov, Best says.
Regardless of whether you’re missing payments or have finished off the last payment, millennial graduates must be diligent with their student loan records and documents.
“Servicers have recently found themselves in hot water by failing to provide accurate tax information to borrowers, potentially costing unaware millennials up to $2,500 come tax time,” Best says.
“Too many times, we don’t hear from a potential client until after this turns into a garnishment,” he adds.