5 easy tips will help you master your student loans

NEW YORK – Graduating into a barren job market is stressful enough. When massive student loans await, the rite of passage can be downright terrifying. "A lot of people are coming out of college with more debt than ever before, and they're graduating at a time when it's going to be harder to get job," said Lauren Asher, president of the Institute for College Access & Success, a California-based nonprofit agency that runs the Project on Student Debt.
The group estimates that two-thirds of graduates from four-year universities have student loans, with an average debt of $22,000.
Still, Asher says that knowing your options can ease the burden.
Here are five steps to help master your student loans.

 Know what you owe

The first step is understanding how a student loan works. Although the interest rate on federal loans tends to be favorable, it kicks into gear as soon as the loan is taken out. That means you've got four years of interest on top of your loans by the time you graduate.
And the meter on interest doesn't stop running during the grace period before repayment begins. The exception is with subsidized federal loans, in which the government picks up the interest until the loan becomes due. Students need to demonstrate financial need to qualify for subsidized loans. Interest on unsubsidized loans begins accruing right away.

Pick a plan

The standard repayment plan for federal loans is typically 10 years.
Extended plans can be tempting because they require smaller monthly payments. But it also means you're paying interest over a longer period, which pushes up the total cost.
"Use as short a loan term as possible. You don't want to be paying your own student loans when your kids are graduating," said Mark Kantrowitz, publisher of FinAid.org.
If you can't keep up with the payment schedule, you can always switch plans. You're allowed at least one change a year with federal loans.
A new option for federal loans starting in July is the Income-Based Repayment program. Eligibility is determined by weighing your debt level against your income.
There may be no monthly payments required for those who earn less than a certain threshold, currently about $16,000 a year. Otherwise, your monthly payment is generally capped at 15 percent of your earnings above that amount.
Any debt remaining after 25 years is forgiven, unless you start making enough money that you no longer qualify for the program.

Try deferring payment

You can defer payment on federal loans under select circumstances, including military service, unemployment and economic hardship. With private loans, the rules on postponing payment (called "forbearance") are set by the lender.
Try to avoid delaying payment if you can because interest continues accruing unless you have a subsidized federal loan.
Graduate school is one way to defer payment on most federal or private loans, but that can backfire.
"It could add to your loan amount. And at some point, your loans will come due," said Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project.
To qualify for unemployment deferment on federal loans, you need to demonstrate that you're looking for work.
You could also qualify for economic-hardship deferment if your income is below about $16,000, you get public assistance or you work in public service.
Deferment for unemployment and economic hardship are each limited to three years.

Consider consolidating

A consolidation loan lets you combine loans to make a single monthly payment. You also get a fixed interest rate for the life of the new loan.
This might benefit those who got federal loans before July 2006, when interest rates were variable. You might even want to "consolidate" a single federal loan if it has a higher, variable interest rate.
If you've been out of school for a while and are running into trouble making payments, a consolidation loan is a way to get renewed deferment rights. Most federal loans can be consolidated under the Federal Direct Loan Consolidation program.
One drawback is that consolidation usually extends repayment, meaning the overall cost of the loan will be higher. A calculator on loanconsolida tion.ed.gov can help determine whether a consolidation loan will save you money.
There is no fee or cost to consolidate. Some federal loans, such as the Stafford and PLUS loans, might charge a fee that is deducted from the disbursement check, but there should never be an upfront fee.
Consolidation might not be an option if you have private loans because most private lenders are getting out of the federal loan business and generally trying to reduce risk.

Avoid default

Defaulting on a student loan comes with some ugly consequences.
To start, the default will go on your credit profile and likely obliterate your chances of getting any other type of loan, such as a credit card or mortgage.
That's because federal loans, with their favorable interest rates, are regarded as among the easiest to repay, said Kantrowitz of FinAid.org.
The cost of your loan will jump too. On top of late fees, you'll also be liable for collection costs, including court and attorney fees.
The government can also garnishee wages up to 15 percent, a practice that can follow you late into life. Student loans typically aren't discharged in bankruptcy filing either.

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New student loan repayment plan is based on borrower's income

New student loan repayment options came just in time for Jeff Zollinger.

The 32-year-old father of two just graduated from architecture school with $125,000 in debt. He and his wife, an audiologist, expect to make good money someday -- more than enough to pay the loans. But between the rotten economy and a new baby, the Savannah, Ga., couple have only been able to find part-time work. They're struggling to make ends meet, so the $1,200 a month that Jeff's lenders want on his loans doesn't seem feasible.

Fortunately for the Zollingers, a new federal student loan repayment plan goes into effect this month that could dramatically reduce payments for highly indebted borrowers. Called "income-based repayment," the plan limits the monthly payments to a percentage of the borrower's monthly income.

The program is complex and won't apply to every borrower. But those who have federal student loan balances that exceed their annual income almost certainly qualify, said Edie Irons, communications director for the Institute for College Access and Success in Berkeley. In many cases, loan payments could be sliced in half.

How does it work, and how can you apply? Here's a look.

What's income-based repayment?

It's the newest of six repayment options for federal student loans. It differs from most options in that the other loan payment plans are designed to repay the balance over a set period of time, such as 10 years. Income-based repayment doesn't base payments on a set payoff date. Instead, the payments are based on the borrower's discretionary income. That's calculated by determining how much the borrower's income exceeds federal poverty guidelines for his or her family size and location. The less you earn, the less you pay.



If you pay less each month, doesn't that mean you'll pay for more years and end up paying more interest, too?

Yes. Interest accrues on student loan balances each month and if you're paying less than the interest that's accruing, the balance of your loan could actually rise. For that reason, anyone who could afford to pay more would be advised to, Irons said. But if the loan payments are making it impossible to pay other bills, this gives you the flexibility to help your cash flow without hurting your credit.

Does that mean I'll be paying on my student loans forever?

No. This plan says that any borrower who has faithfully made payments for 25 years can have his or her remaining loan balance forgiven or wiped away at the end of that time.

In addition, if you work for government or a nonprofit and repay your debts under the direct loan program for 10 years, you could have your loan balance wiped out faster under another federal program called Public Service Debt Forgiveness.

How much would I have to pay each month?

That depends on your income, your debt and the number of people in your household. However, the Education Department says if you are single and earning $20,000 annually, the most you'd have to pay against student loans is $47 a month. If you earned $25,000, the required payment would be $109. If you earned $35,000, the required payment would be capped at $234.

Comparatively, if you had $50,000 in student debt at a 6.8% interest rate, you'd have to pay $575.40 a month under the standard repayment plan, no matter how much you earned.

Am I going to be locked out of the program if I earn more?

No. The formula determining whether you qualify looks at your loan payments versus your discretionary income. You could have a substantial income and still qualify if you also have a lot of debt. Borrower's payments are adjusted once annually to reflect changes in income and family size.



Can I do this with all my loans?

The program is only available for federal student loans under the Stafford, Grad Plus and federal consolidation loan programs. It does not apply to parent's loans for students (called Plus Loans), and only applies to Perkins Loans if they're consolidated into the Federal Family Education Loan or Direct Loan programs. It also does not apply to private loans, state loans and loans that are not backed by the federal government.







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