(The author is a Reuters contributor. The opinions expressed
are her own.)
By Kathleen Kingsbury
BOSTON May 24 College graduates are carrying
more than just their diplomas this spring as they enter the real
world: student loan debt - a lot of it.
Seventy percent of the Class of 2013 is graduating indebted,
with an average balance of $35,200, says a recent Fidelity
This graduating class also faces a new payback regimen: They
won't get the six-month interest-free grace period their older
siblings saw, while repayment options for those who graduate
into low-paying jobs will be more generous.
The best payment plans can save you money and buy you time.
So collect the diploma, toss that mortarboard in the air, and
make sure to choose wisely when it comes to repaying your loans.
"Know how much you owe, to whom you owe it, and when you
need to start making payments," says Lauren Asher, president of
the nonprofit Institute for College Success & Access, a research
and advocacy group.
Identify your lenders and make sure they know how to reach
you. "If they send a bill to an email or mailing address you're
no longer using, you are still responsible for paying it on
time," Asher says. Failure to do so can hit your credit score.
Federal loans include Stafford or Perkins loans. Private
loans are generally issued by a bank or finance company. Every
private lender will have its own interest rates and pay-back
rules. Federal rules are standardized.
Your on-campus financial aid office can help - with
information and advice. And, it is required to provide exit
interviews. The U.S. Department of Education [link: studentaid.ed.gov/repay-loans
] also provides online support, including a repayment
You can choose to roll all of your federal loans into one
big loan for simplicity's sake, and this might be a good time to
do that, because current interest rates are at or near all-time
lows. The new loan's interest rate would be the weighted average
of all the interest rates being combined, rounded up to the
nearest 1/8 of a percent and capped at 8.25 percent - higher
than most of today's graduates would encounter.
But consolidation is not for everyone. It generally
lengthens the repayment period from 10 to 30 years, so you will
pay more in interest over the long term.
Federal loans can't be consolidated with private loans,
though some private lenders do offer several refinancing
PICK A REPAYMENT PLAN
This year's grads benefit from a broad range of repayment
options on their federal loans; they basically have the choice
of lowering their monthly payments or lowering their total
interest costs. Even students who consolidate their loans can
choose among repayment options. (There is a full menu at the
Education Department's website, studentaid.ed.gov/repay-loans#repayment-plans).
Those who don't actively make a choice will be automatically
put into a 10-year plan, with payments that could place a hefty
burden on starter salaries.
Graduates who are moving into low-paying jobs or still
trying to land their first job can choose a new repayment
option. The Pay As You Earn plan, an Obama Administration
initiative launched last December, pegs monthly payments to
That can open doors. Ask Katie Hutchinson. After an
undergraduate turn at Pennsylvania's Swarthmore College and then
midwifery school at Yale University, Hutchinson was volunteering
in Africa for Doctors Without Borders and trying to keep up
monthly loan payments of $400. After she enrolled in Pay as You
Earn precursor, the monthly amount dropped to $27.
"When the larger payments went away, a huge weight was
lifted," Hutchinson says.
Pay As You Earn payments can be as low as zero. The formula
is complex, but basically requires you to only pay 10 percent of
your discretionary income - the amount it exceeds 150 percent of
the poverty rate.
Furthermore, if after 20 years you still have a balance, it
would be forgiven. For public or nonprofit sector workers -
teachers, for example - debt is forgiven after 10 years.
To qualify, your income must be below a certain level -
typically if your annual salary is less than the amount you owe.
START MAKING PAYMENTS
Though this year's graduates will get a six-month grace
period before they must start paying back student loans,
interest will start accruing on graduation day. So it makes
sense to start payments on all loans as soon as you've selected
the right repayment plan. At 6.8 percent, a $5,000 loan will add
$160 in the first six months that will continue to be part of
your loan balance and thus compound additional interest.
To stay on top of payments - and potentially get a .25
percent discount on interest from a private lender - sign up for
automatic monthly payments via a checking account. After one
year of consistent on-time payments, many private lenders offer
an additional discount of .75 percent.
Finally, making regular on-time payments of your student
loans will help you build a good credit score.
Congratulations, and welcome to the real world.
(Follow us @ReutersMoney or here
Editing by Linda Stern and Gunna Dickson)