As payments come due, some answers on student loan options

[June 10, 2014]  By Liz Weston

LOS ANGELES (Reuters) - Recent college graduates will soon face the first payment on their student loans, even as millions of families nationwide wonder how they'll settle the rising cost of college.

To answer their questions, Reuters hosted a Twitter chat June 4 that included experts in financial aid, student loans and personal finance - including myself, Mark Kantrowitz, senior vice president and publisher of Edvisors Network Inc, and Reyna Gobel, author of "Graduation Debt: How to Manage Your Student Loans and Live Your Life."

Here's a sample of the questions asked during the chat and advice from the experts who participated.

Q: What advice do you have for recent grads who have student debt? What should they do first?

A: Graduates first need to understand that there's no longer a good reason to default on federal student loans, said Gobel.

The Department of Education now offers a slew of repayment options, including some that can reduce a borrower's payment to zero while still keeping them current, said Kantrowitz.

Borrowers can get out of default and even erase the negative marks from their credit reports with rehabilitation programs. Repayment options are explained on the department’s Web site (https://studentaid.ed.gov/).
 

"The student loan crisis is due to a lack of education on repayment plans, not money," Gobel tweeted during the chat.

After 90 days of non-payment, federal student loans are considered delinquent and reported as late to credit bureaus, which can hurt borrowers' credit scores. After 270 days of nonpayment, federal loans are considered in default and collections activity can begin, including wage garnishment and seized tax refunds.

To avoid a late start, graduates should pay close attention to the due dates for their first loan payments, which vary by servicer, Kantrowitz said. Typically, that first payment is due six months after the student graduates or drops below half-time enrollment. He recommended graduates put a reminder on their calendars two weeks before the due date to make sure payments are made on time.

Signing up for automatic payments could also trim 0.25 percent to 0.50 percent off the loan's interest rate, Kantrowitz said.

Q: When saddled with student loan debt, is it more efficient to just consolidate and lock in a low rate?

A: Consolidating federal student loans typically won't change the overall interest rate paid, since the new rate is a weighted average of the original fixed-rate loans.

But consolidating makes repayment simpler - one loan payment instead of several - and choosing a payback period longer than the standard 10 years can lower monthly payments.

That increases the total interest the borrower may have to pay, but lower payments could free up money for other important goals, such as saving for retirement and paying down private student loans, which typically have variable rates, less accommodating payment plans and few consumer protections.

One downside to consolidating is that it can prevent a borrower from tackling highest-rate debt first if he or she can make extra payments on the debt, Kantrowitz said.
 

Those with private loans can explore private loan consolidation, which is now offered by more lenders, including Discover, Wells Fargo, RBS Citizens and many credit unions. Borrowers with good incomes and credit scores can qualify for low, and in some cases, fixed rates.

Q: Is it a good idea to defer a loan? What are the risks?

A: Deferment allows the borrower to temporarily delay loan repayments because of economic hardship. On certain loans - Federal Perkins Loans, Direct Subsidized Loans and Subsidized Stafford Loans - the government may pay the interest.

Otherwise, interest continues to accrue, "digging borrower into (a) deeper hole," Kantrowitz tweeted.

Borrowers who don't qualify for deferment may be able to get forbearance, which also means interest accrues.

More information may be found on the Web site (https://studentaid.ed.gov/repay-loans/deferment-forbearance).

"Deferment is good for short-term financial difficulty," Kantrowitz tweeted. "For long-term problems, look into alternate payment plan."

Q: What about public service forgiveness options?

A: People with big federal student loan debt and low incomes can benefit from two relatively new repayment plans: income-based repayment and "Pay as You Earn."

Both cap the borrower's monthly payment (the Pay as You Earn cap is typically the lowest). The Public Service Loan Forgiveness plan erases remaining Direct Loan balances after 10 years for people who work full time in eligible jobs, which include police, fire, military, public schools and nonprofits, Kantrowitz said. Other borrowers may be eligible for forgiveness after 20 to 25 years.
 

But borrowers who hope to qualify for forgiveness need to sign up for income-based or Pay as You Earn programs. Otherwise, they'll be signed up for the standard repayment plan which requires higher payments.

"If there’s any chance you qualify for public service loan forgiveness, choose an income-related plan," Gobel tweeted.

(Editing by Beth Pinsker and Bernadette Baum)

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