This blog post is the second in CFP Board’s “Financial Planning for Everyone” series.
Here’s how the story goes for many college grads: You take out student loans to get your degree. You get that degree to get a decent paying job. You get that job so you can repay those student loans.
Welcome to the catch-22 of the real world.
Student debt in the U.S. has reached alarming levels – over $1 trillion in the aggregate and more than $35,000 on average for 2013 grads. Our nation’s lawmakers, when not worrying about our national debt, are trying to address the problem of student indebtedness.
Making the discussion even more urgent is the looming July 1 deadline when the rate on federal loans will double to 6.8 percent from the current 3.4 percent, unless congressional action is taken.
But aggregates, averages and future legislative fixes are probably irrelevant to new college grads. They have their own unique, red-inked numbers to worry about. How will they handle their debt? What are their options?
If such is your case, take a deep breath and go slow. If you are in the 6-month, post-graduation grace period before you have to start paying your federal loans, use the time to get informed and do the necessary analysis to make the right decision about your payment options. If you have already started repaying your loans, you may still have the opportunity to change amounts, loan terms and payment methods through election of special repayment options or loan consolidation.
Here are some steps that will help put you on the right path to paying down your student loan debt:
- Identify all your loans. If you have federal loans, go to the National Student Loan Data System to identify your loan type—such as Direct, Stafford, Plus or Perkins—and the amount of each. If you have private loans through a bank or other lending institution, contact the loan servicer. The type of loan, the identity of the issuer, the identity of the borrower (you or your parents) and the amount of the loan will determine your repayment options.
- Define your overall financial planning goals. What kind of future do you hope for? Are marriage, children and home ownership likely? Do you want to teach or go into public service? Will you be entering a career that will likely pay high or increasing wages over time? Is your goal to be debt-free by a certain age or period of your life? The answers to these broad questions have very specific implications for a repayment plan that is right for you. And your career choice or desire to continue your education can make you eligible for deferment of your loan payments, and in some cases, even result in forgiveness of your indebtedness. For example, the federal government’s Public Service Loan Forgiveness Program offers graduates working in public service – including for the government or non-profit organizations such as schools or foundations – the opportunity to qualify for loan forgiveness after successfully making 120 monthly payments.
- Evaluate your alternatives. Generally speaking, you can base your loan repayment plan either on your income if you meet certain financial criteria, or the amount of your indebtedness. Each option carries its own array of loan terms, such as time period for repayment and whether the monthly payment amount increases over time. A useful tool for comparing the various repayment plans—in terms of initial monthly payment, final monthly payment, total interest paid and total amount paid—can be found at StudentLoans.gov.
- Monitor your progress. Keep tabs on your loan payments and total indebtedness. If your repayment plan is no longer appropriate to your financial needs or circumstances, contact your loan servicers to discuss alternative options. Whatever you do, do not be delinquent in paying your loan, or go into default (usually defined as going 270 days without making required payments). The consequences can be serious: you may be unable to get other credit, rent an apartment, or even be considered for a job. If you do have a job, your wages could be garnished.
A final thought: Professional advice can pay for itself when it comes to strategies for your student loans. The rules are complex and changing, and a wrong or hasty decision can cost plenty. Talk to a CFP® professional who can help you keep those student loans in perspective.
Student loans should be the key to a better future, not a lifelong burden holding you back.