Cramming is done. Graduation is over. Then comes the tricky part: paying back those loans from the government and other lenders that helped finance your higher education. Graduates must prepare for what may be their toughest assignment ever. And for those who are still in school, it wouldn't hurt to be mindful of the obligation that's coming up all too soon.
The first step toward taking control of loan payments is to attend a financial counseling session that the government requires schools to provide for graduating students with federal debts or government-guaranteed loans. Depending on the school, exit counseling may take place online (lasting about 25 minutes) or in person (workshops may run about an hour or so). The seminar will spell out your responsibilities, repayment options, what to do if you run into trouble paying the loan, and what happens if you default.
Dismiss any notion of letting a student loan linger until the lender forgets about you. They won't. Crackdowns in recent years have turned up the heat on deadbeats. "I've spoken with students who think they don't have to pay them back," says Scott Dingwall, director of the Consumer Credit Counseling Service of Central New Jersey. "But it's not so easy to get them forgiven, and unless you have a catastrophic event, you're going to have to pay the loans back."
The consequences of defaulting on a student loan are severe and could haunt a borrower for years. Take a gander at what can happen:
• Your credit score can plummet, making it hard to buy a car or a house. It might also be difficult to get your first apartment or job, as some landlords and employers review applicants' credit ratings.
• Your wages can be garnished.
• Your federal and state tax refunds can be seized.
• You might be on the hook for hefty collection and late fees.
• Your professional licenses can be suspended.
The monthly obligation
How much you must pay back and how fast depends on the type of loan and who granted it. If you have a Perkins loan, the graduate makes a fixed payment of at least $40 every month until the loan is paid off. (The payment is determined by dividing the amount owed, including interest, by 120 months.)
Students with Stafford loans can choose among four repayment plans, which may vary slightly depending on the lender. Students who borrowed Stafford loans through the Federal Family Education Loan program (FFEL) can switch repayment options once a year. Those who borrowed Staffords through the William D. Ford Federal Direct Loan program (DIRECT) can change plans virtually any time, as long as the loan is not in default. The options for graduates with Stafford loans:
• Standard repayment. Graduates pay a fixed amount of at least $50 a month so that the loan is paid in full within 10 years.
• Extended repayment. Graduates pay at least $50 a month but can stretch out payment over a longer period (typically between 12 years and 30 years). For DIRECT Staffords, the amount of time until payoff depends on the amount owed. If less than $10,000 is owed, for example, the graduate gets 12 years to pay it off; between $10,000 and $20,000, 15 years; between $20,000 and $40,000, 20 years; and so on. This plan is available to DIRECT borrowers, and to FFEL borrowers who owe at least $30,000 and who received their first loan on or after October 7, 1998.
