Like most recent college grads, Tamika Gambrell, now 26, left school with hefty student loans–debt that now has to be paid, along with all the other bills that come with living on one’s own.
Gambrell, who lives in Glenolden, Pennsylvania, right outside of Philadelphia, earns good money working as a sales analyst for a large consumer products company. Still, even with her $60,000 a year salary, and annual bonuses that tack on another $5,000 in take-home pay, it’s tough stretching her paycheck to meet all her financial obligations.
For starters, there’s the $840 a month that Gambrell and her partner pay to rent their apartment. Then there’s a $280 monthly car note. After graduating in 2003 with a degree in human development from Colby College, a small liberal arts school in Maine, Gambrell racked up $24,000 in credit card debt, so that’s another $300 a month out of the budget. Driving 60 miles to and from work each day means spending $300 on gas every month. When you throw in 401(k) contributions, healthcare premiums, taxes, food, utilities, and, of course, her $133 monthly student loan payment, it’s easy to see why money can get tight.
Still, in many ways Gambrell considers herself fortunate. “After four years, I walked away owing only $28,000 in loans. Considering that tuition and room and board alone at Colby was $35,000 a year, I think I did alright,” she says.
Like millions of people in their 20s, 30s, 40s, and beyond, Gambrell took out student loans for a shot at a better quality of life and the chance to improve her career options. But with the price tag for a college education skyrocketing, the typical student graduates with nearly $20,000 in student loan debt. According to the College Board, the cost of attending a public, four-year college or university in the 2006—07 school year–including tuition, fees, and room and board–was $12,796, up 35% over the past five years; for private schools, the cost was a hefty $30,367.
Ensuring that you don’t end up drowning in student loan debt requires solid money management skills, a working knowledge of how these loans work, the realization that interest rates are somewhat negotiable, and a familiarity with available government assistance programs. Read on and we’ll help you navigate the world of student loan debt.
Bone Up on Your Loan Details
To retire those student loans quickly, first get a handle on the types of loans you have. Start by logging on to www.nslds.ed.gov, the Website for the National Student Loan Data System. There’s a lot of information there, including all the federal loans a student owes, the dates various loans were received, how much interest and principal are outstanding, and the status of the loans (i.e., if they’re in deferment, default, repayment, etc.). Before loan details can be obtained from the NSLDS, you must first secure a four-digit PIN from the Department of Education, available at www.pin.ed.gov.
For those with private loans, call or write lenders directly, contact the school that provided the loan, or refer to the old promissory notes you signed while still in college.
Many borrowers don’t know the difference between federal loans and private loans, mistakenly thinking that “a loan is a loan.” But that’s not the case. For starters, private loans are usually more costly. “I would take the stance of ‘buyer beware’ with private loans, because private loans have variable interest rates,” says Marc Woolf, an expert on student lending. “Obviously one has to find out what sort of vehicle it’s tied to. Is it LIBOR [the London Interbank Offered Rate, an interest rate at which banks can borrow], increases in the federal funds rate, or something else?”
Federal loans, on the other hand, have government-imposed caps on their interest rates, which are fixed, currently at 6.8% for Stafford Loans. Private loans have variable interest rates and now average 10%, according to Robert Shireman, head of the Project on Student Debt (www.projectonstudentdebt.org).
Another key difference: many federal loans, such as Stafford loans, are subsidized, which means that while you’re in school, the government pays the interest on your loans. Private loans have no such subsidy. As a result, if you don’t pay the interest on your loans while you’re in school (and more than 90% of students don’t), the interest accrues and gets capitalized, or added to the original loan balance. By the time the typical student graduates, thousands of dollars in interest have been tacked onto his or her college debt.
Negotiate Your Rate
Every July 1, Congress adjusts the interest rate caps charged on federal student loans. The feds don’t set the rates, however; they impose a maximum or “cap” interest rate that lenders can charge. Lenders then set their own rates based on what the market will bear. If you’re willing to negotiate and ask for more favorable rates and loan terms, you’ll find many lenders will agree to charge a rate lower than the federal maximum interest rate. Negotiate lower rates for:
Having payments automatically deducted from your checking or savings account
Making a set number of on-time payments (24 to 48 months of on-time payments often qualifies you for a rate cut, and a few lenders will give you a break even sooner. For example, one national student loan company called MyRichUncle (www.MyRichUncle.com) offers borrowers an up-front interest rate cut of up to 1.75% as soon as they begin repaying their loans–not years later.
Earning good grades, or qualifying for any other incentives a lender offers. By negotiating your student loan interest rate, you can save yourself lots of time and money.
Bite the Bullet Now
To eliminate student loan debt as fast as possible, a key question to ask is: how much will I pay over the life of my loan or loans? Trying to figure out how much you’ll pay in interest over 10, 20, or 30 years can be tricky.
Begin by checking out the free online college loan calculators provided by FinAid at www.finaid.org/calculators. These calculators help you figure out how much money you’ll fork over, in principal and interest, for various federal student loans, using the four different loan repayment plans:
The standard loan repayment plan, in which you pay a minimum of $50 a month and your payments last for up to 10 years;
The extended repayment option, which also requires monthly payments of at least $50, but which lets you pay off your educational loans over 12 to 30 years;
The graduated repayment program, which lasts from 12 to 30 years and allows you to pay as little as $25 a month;
The income contingent repayment plan, which permits you to pay as little as $5 a month and lasts for 25 years.
While it may sound like an attractive option to preserve your cash flow and select the plan that will let you pay the lowest monthly payment, beware of doing so. The longer payments are stretched out, the more you’ll pay in interest. The best advice: To pay off the debt as quickly as possible, opt for the standard repayment plan, which will allow you to pay off your student loans in a decade or less. Alternatively, make extra payments on top of the normal monthly payment. Even if you can only afford to throw in an additional $25 or $50 a month, every extra little bit will help.
Consolidate Carefully
You’ve no doubt received offers to consolidate your student loans. If you do consolidate, do so wisely. Private loans and federal loans must be kept separate; they cannot be consolidated. Also, be careful which loans you roll into one bigger loan. Let’s say you took out federal Perkins loans. In most cases you wouldn’t want to combine a Perkins loan with other types of loans, because Perkins loans have better loan forgiveness benefits for people who go into teaching. Consolidating them with other loans may cause you to lose those bene
fits.
Though Gambrell had the bulk of her education paid for with grants, the college loans she did receive were federal, unsubsidized loans. With subsidized loans, the government pays the interest on the debt while students are in school. But with unsubsidized loans, that interest doesn’t get paid by the government.
Once she graduated, Gambrell rolled her loans into one payment, consolidating them through the College Loan Corp. at a fixed interest rate of 2.87%. “I got very lucky,” Gambrell acknowledges. “At the time I graduated, jobs weren’t plentiful, but student loan consolidation programs were very, very attractive.”
Help From Uncle Sam
You’ve heard of using OPM–other people’s money–to invest or borrow, right? Well, when it comes to paying off student loans, there’s another OPM to look into: the Office of Personnel Management. This government department runs the Federal Student Loan Repayment Program. If you work for any federal agency–or even if you’re unemployed and looking for a job or willing to switch jobs–you’ll want to seriously investigate this program. The OPM’s student loan repayment program allows any federal organization you work for to pay off your student loans on your behalf–to the tune of $10,000 a year, up to a maximum of $60,000. In exchange for paying your student loans, you must work for a federal agency for a set period of time, usually three years. To learn more about this option, visit www.opm.gov or call 202-606-1800.
There could be some help on the legislative front. The College Cost Reduction and Access Act of 2007 (H.R. 2669) was passed by Congress and signed into law by the president in late September. The bill includes an Income-Based Repayment program modeled after the Project on Student Debt’s Plan for Fair Loan Payments. Among the bill’s features:
Past, present, and future students with federal loans would be assured that their student loans would always be manageable, based on their income and family size.
Additionally, the bill would lower interest rates on subsidized Stafford loans to undergraduates, from the current 6.8% to 6.0% starting July 2008, 5.6% in July 2009, 4.5% in July 2010, and 3.4% in July 2011. In July 2012, rates would revert to 6.8%.
Lastly, the new legislation provides loan forgiveness for public service. Anyone with federal student loans who works at least 10 years in public service professions and makes income-based payments through the Direct Loan program would have any remaining loan balance completely forgiven after 10 years. “It’s definitely worth looking into loan forgiveness opportunities, especially if you are working in the public arena, for the nonprofit sector, or in a government position,” Shireman urges.
In retrospect, Gambrell says she could have minimized her student loan burden by about $3,000 by pushing to get subsidized loans (for which she was told she didn’t qualify) or by paying the interest on those unsubsidized loans while she was still in school. Nevertheless, Gambrell has devised a written plan and timeline to knock out her student loans–as well as her other debts. “I’ve always been into budgeting and being financially savvy,” she says. “My goal is to have the student loans completely paid off within seven or eight years.
Stay Out of Default
If you absolutely can’t pay your student loans, investigate whether you qualify for loan forgiveness or loan cancellation programs. Who can get their loans forgiven or outright canceled? In most cases, police officers, lawyers, teachers, nurses, doctors, and many in the healthcare field. Volunteers at organizations such as Vista or the Peace Corps, or who help those in underserved communities, can also have their student loans written off.
If you inquire about these options and don’t qualify for loan cancellation, do not default on your college debt. Defaulting on a student loan is a big no-no for many reasons. For starters, you’ll hurt your credit standing. You’ll face stiff penalties, late charges, and possible collection fees–which will only add to your debts and to the amount of time it will take to pay them off. Additionally, you’ll make yourself ineligible to receive any future loans, a big concern if you’re trying to finish a degree or go to graduate school. Also, student loans have no statute of limitations, which means the federal government gives lenders the right to come after you anytime–even when you’re retired–to collect past-due college loans. Surely you don’t want your Social Security checks garnisheed!
Don’t make the mistake of keeping quiet if you’re facing a financial hardship, student lending expert Marc Woolf says. “No repo man can say ‘I’m going to take your education,'” he quips. College loans are unique “in that the lender and the school will work very diligently and bend over backward to help a student that’s having problems.” The problem, however, is that students in financial crisis don’t communicate with their school or their lender. “But if they would communicate,” Woolf says, “The school or the lender is usually more than likely to offer the student a deferment or forbearance,” permitting students to postpone making payments.