Graduating into a barren job market is stressful enough. When massive student loans await, the rite of passage can be downright terrifying.
Depending on the type of loan, graduates typically have about six months before the bills start arriving. Among the matters to sort out as the clock ticks down: picking a repayment plan, consolidating loans, weighing deferments.
The Institute for College Access & Success, a California-based nonprofit that runs the Project on Student Debt, estimates that about two-thirds of graduates from four-year universities have student loans, with an average debt of about $22,000.
Here are five steps to help master your student loans.
1. Know what you owe
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.
To see all your federal loans and terms in one place, check www.nslds.ed.gov/nslds_SA. For private loans, you need to contact the lender.
2. Pick a plan, but not any plan
The standard repayment plan for federal loans is 10 years.
Extended plans can be tempting since they require smaller monthly payments. But it means you're paying interest over a longer period, which pushes up the total cost of the loan.
“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 picked, you can always switch plans.
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 so you no longer qualify for the program.
A calculator at www.ibrinfo.org can help determine whether you qualify.
3. Consider postponing 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.
Deferment for unemployment and economic hardship are each limited to three years.
4. Weigh loan consolidation
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.
One drawback is that consolidation usually extends repayment, meaning the overall cost of the loan will be higher. A calculator on Loanconsolidation.ed.gov can help determine whether a consolidation loan will save you money.
5. Avoiding default
Defaulting on a student loan comes with some ugly consequences. The default will go on your credit profile and likely ruin 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 pay collection costs, including court and attorney fees.
The good news is that defaults on student loans can be rehabilitated and erased from your credit report.