Graduating from college can be a double-edged sword. For some young adults in the U.S., it means an important step toward a desired career or goal. However for many, it also can mean having to repay years’ worth of student loan debt.
There are about 43 million federal student loan borrowers, according to Nerdwallet. There are approximately 2.4 million borrowers who have private student loans, Forbes reported in February. The average student loan borrower in the U.S. has left school over $30,000 in debt. In 2017, Black adults were more likely to have debt than any other race and women were more likely to have debt than men, the U.S. Census Bureau reported in August.
Typically, the first student loan payment is due six months after someone graduates,also known as a grace period, according to Barry Coleman, vice president of counseling and education programs at the National Foundation for Credit Counseling. The organization provides counseling services designed to look at a person’s unique situation and help them develop a plan of action for paying their loans back.
YR Media spoke with Coleman about how postgrads can successfully manage their debt.
- Know your obligations
Knowing what’s required of you as it relates to your loans is a great first step in managing your debt after graduation, Coleman said. That involves getting access to the student loan promissory note that’s granted to a borrower at the time loans are issued. The note helps the borrower understand the requirements related to loans including interest rates associated with it, finding out when student loan payments are due, how much is owed and the kind of loans a borrower has.
“Becoming familiar with that document ensures that they understand what their obligation is, so they can meet that obligation,” Coleman said. Coleman said the note can be retrieved from the student loan servicer who granted the loans.
- Know your repayment options
After a borrower understands their rights and responsibilities as it relates to their loan, they should think about what their loan repayment options are, Coleman said. The repayment options differ depending on what entity provided them with their student loans.
Federal student loans offer a variety of options. The standard option allows payments to be on a fixed amount that ensures loans are paid off within 10 years. Another option is called the graduated repayment plan. Under this plan, payments are lower at first and increase every two years until the loans are paid off within 10 years. Details about these options and others can be found at studentaid.gov.
Meanwhile, private loans tend to have limited options, with each one determined by the lender, Coleman said. Sallie Mae, for example, doesn’t offer as many options as federal student loans, but offers its graduated repayment period to allow for budget flexibility as post-graduates transition to their careers. The period allows borrowers to pay interest-only payments for one year that would be lower than payments would be otherwise. But after the year, payments that follow and one’s total loan cost would be higher.
- Know your goals
Is a borrower looking to start a family soon? Are they looking to buy a house or rent an apartment? How much money are they making each month? These are the kind of questions Coleman said are relevant to developing a personalized repayment plan and budget. Income, occupation and financial goals are factors that help steer a borrower toward a plan that best suits them.
For example, a borrower who works for a government organization or a nonprofit may aim to seek forgiveness that’s available to those who work in those fields, Coleman explained. That situation may lend itself more to a repayment plan that allows them to pay as little as they can, he said.
“They’re not trying to pay a whole lot at this point, because after a certain number of years the loans are going to be forgiven anyway,” he said.
Meanwhile, someone who has federal student loans, wants to pay them off as quickly as possible and has room in their budget to make higher payments, may find the standard repayment plan more advantageous.
“Once they’ve chosen their repayment plan, they should develop a personal budget and incorporate that student loan repayment into it,” he said. “It’s important they understand what their obligation is and that they are creating their budget so they can meet that obligation.”
- Don’t request a forbearance unless it’s necessary
Student loan forbearance allows you to temporarily stop making student loan payments. But Coleman cautions borrowers from turning to this option if they have the means to make their monthly payments. That’s because in the longrun, they will end up taking on more debt.
“When a loan is in forbearance interest is accruing on it so the balance is also accruing,” Coleman said. “That’s how those balances can really increase and borrowers may look at their loans after several months and be shocked by how much their balances have gone up.”
Forbearance should be considered during emergency situations such as if a borrower doesn’t have income.