(The author is a Reuters columnist. The opinions expressed are
By Liz Weston
LOS ANGELES, June 9 Recent college graduates
will soon face the first payment on their student loans, even as
millions of families nationwide wonder how they'll settle the
rising cost of college.
To answer their questions, Reuters hosted a Twitter chat
June 4 that included experts in financial aid, student loans and
personal finance - including myself, Mark Kantrowitz, senior
vice president and publisher of Edvisors Network Inc, and Reyna
Gobel, author of "Graduation Debt: How to Manage Your Student
Loans and Live Your Life."
Here's a sample of the questions asked during the chat and
advice from the experts who participated.
Q: What advice do you have for recent grads who have student
debt? What should they do first?
A: Graduates first need to understand that there's no longer
a good reason to default on federal student loans, said Gobel.
The Department of Education now offers a slew of repayment
options, including some that can reduce a borrower's payment to
zero while still keeping them current, said Kantrowitz.
Borrowers can get out of default and even erase the negative
marks from their credit reports with rehabilitation programs.
Repayment options are explained on the department's Web site (studentaid.ed.gov/).
"The student loan crisis is due to a lack of education on
repayment plans, not money," Gobel tweeted during the chat.
After 90 days of non-payment, federal student loans are
considered delinquent and reported as late to credit bureaus,
which can hurt borrowers' credit scores. After 270 days of
nonpayment, federal loans are considered in default and
collections activity can begin, including wage garnishment and
seized tax refunds.
To avoid a late start, graduates should pay close attention
to the due dates for their first loan payments, which vary by
servicer, Kantrowitz said. Typically, that first payment is due
six months after the student graduates or drops below half-time
enrollment. He recommended graduates put a reminder on their
calendars two weeks before the due date to make sure payments
are made on time.
Signing up for automatic payments could also trim 0.25
percent to 0.50 percent off the loan's interest rate, Kantrowitz
Q: When saddled with student loan debt, is it more efficient
to just consolidate and lock in a low rate?
A: Consolidating federal student loans typically won't
change the overall interest rate paid, since the new rate is a
weighted average of the original fixed-rate loans.
But consolidating makes repayment simpler - one loan payment
instead of several - and choosing a payback period longer than
the standard 10 years can lower monthly payments.
That increases the total interest the borrower may have to
pay, but lower payments could free up money for other important
goals, such as saving for retirement and paying down private
student loans, which typically have variable rates, less
accommodating payment plans and few consumer protections.
One downside to consolidating is that it can prevent a
borrower from tackling highest-rate debt first if he or she can
make extra payments on the debt, Kantrowitz said.
Those with private loans can explore private loan
consolidation, which is now offered by more lenders, including
Discover, Wells Fargo, RBS Citizens and many credit unions.
Borrowers with good incomes and credit scores can qualify for
low, and in some cases, fixed rates.
Q: Is it a good idea to defer a loan? What are the risks?
A: Deferment allows the borrower to temporarily delay loan
repayments because of economic hardship. On certain loans -
Federal Perkins Loans, Direct Subsidized Loans and Subsidized
Stafford Loans - the government may pay the interest.
Otherwise, interest continues to accrue, "digging borrower
into (a) deeper hole," Kantrowitz tweeted.
Borrowers who don't qualify for deferment may be able to get
forbearance, which also means interest accrues.
More information may be found on the Web site (here).
"Deferment is good for short-term financial difficulty,"
Kantrowitz tweeted. "For long-term problems, look into alternate
Q: What about public service forgiveness options?
A: People with big federal student loan debt and low incomes
can benefit from two relatively new repayment plans:
income-based repayment and "Pay as You Earn."
Both cap the borrower's monthly payment (the Pay as You Earn
cap is typically the lowest). The Public Service Loan
Forgiveness plan erases remaining Direct Loan balances after 10
years for people who work full time in eligible jobs, which
include police, fire, military, public schools and nonprofits,
Kantrowitz said. Other borrowers may be eligible for forgiveness
after 20 to 25 years.
But borrowers who hope to qualify for forgiveness need to
sign up for income-based or Pay as You Earn programs. Otherwise,
they'll be signed up for the standard repayment plan which
requires higher payments.
"If there's any chance you qualify for public service loan
forgiveness, choose an income-related plan," Gobel tweeted.
(Editing by Beth Pinsker and Bernadette Baum)