The six-month grace period for many student loans is about to expire for new college graduates. If the past is any guide, many people will miss their first payment and some will end up defaulting on their loans—even though there’s usually no good reason for that to happen.
The stakes are high: even a single missed payment on a credit account can damage an individual’s credit scores, although many loan servicers don’t report delinquencies until borrowers are 90 days or more overdue. Borrowers who default—failing to pay for nine months or more—face having some of their wages and all of their tax refunds seized by the government.
Yet many borrowers may have already lost track of what they owe, and their lenders may have lost track of them because of address or email changes.
That’s still no excuse for not paying.
Borrowers shouldn’t wait to get a bill before making plans to repay the debt. Instead, here’s how new graduates should tackle their student loans:
1. Know what you owe
The typical borrower with student loan debt has four loans, according to a recent Experian study, and it’s not unusual to accumulate far more.
A borrower’s first task is to make a list of every loan, including the balance owed, the type of loan (federal or private), the date the first payment is due and the servicer, or the company designated to take your payments.
Borrowers should check the National Student Loan Data System for any federal loans they may have forgotten or for which they need more information. To uncover private loans, borrowers should get copies of their credit reports from AnnualCreditReport.com.
Recent federal loans have names that include Direct, Perkins, Stafford, PLUS, or Grad PLUS. Older loans include Federal Family Education Loan (FFEL). Private loans are typically issued by banks, credit unions, colleges, or non-profits.
2. Reach out for help
Borrowers typically can get access to their loan accounts online, and doing so can make managing multiple loans easier. Graduates should take the time to update their addresses and emails with the loan servicers so that they don’t miss critical communications.
3. Explore payment options
Income-based repayment plans, along with generous deferral and forbearance options that offer payment relief for up to three years, can keep the vast majority of federal student loan borrowers from defaulting, says Reyna Gobel, author of the book CliffsNotes Graduation Debt.
Private student loans offer fewer options for strapped borrowers. But some forbearance or deferral is typically available for those who are unemployed or facing other economic setbacks.
Even graduates who can manage their first payments should investigate alternatives.
Pay as You Earn, a federal income-based program, could lower payments to less than 10% of the borrower’s income—and those who work in public service jobs could be eligible for forgiveness of any remaining balances after 10 years of payments. (Those who work in non-public service jobs can get forgiveness after 20 to 25 years, depending on when the debt was incurred.)
If you’re unemployed or not earning much, Pay as You Earn can lower your payment to zero—while still keeping you out of default. Extended and graduated payment programs also can make payments more manageable. For more information, check the Department of Education’s student aid site and the Consumer Financial Protection Bureau’s Repay Student Debt tool.
4. Research consolidation
Consolidation used to be a way to lower interest rates on federal debt and make one payment instead of several. Today, federal student loans offer fixed rates, and consolidation merely offers a weighted average of those rates.
Plus, many borrowers now have just one servicer even if they have several federal loans, so they may already have the convenience of a single payment. The best reason to consolidate may be to opt for lower payments by choosing a longer payback period—15, 20, or 30 years instead of the typical 10 years, for example. But that increases the total cost of the loan.
The Student Loan Borrowers Assistance site has information about the pros and cons of consolidation.
One good reason for taking longer to pay back federal loans is to free up more money to pay off private loans, which typically have variable interest rates and few consumer protections.
Private loans cannot be included in a federal student loan consolidation. A few lenders offer private consolidation or refinancing that can include federal student loans, but borrowers could lose critical protections if they turn federal debt into private debt.
5. Rethink aggressive payment plans
Borrowers with decent incomes may be tempted to throw every available dollar at their debt. While this may decrease the interest they pay, they could be poorer in the long run if they don’t take advantage of opportunities to save.
Another problem with rapid debt repayment is a potential loss of financial flexibility. Money paid to student lenders is gone for good, unlike money accumulated in savings. A layoff or other economic setback could leave the borrower scrambling for cash.
6. Know where to find help
Borrowers should first contact their loan servicers to try to resolve any disputes. If that doesn’t work, borrowers can contact the Federal Student Aid Ombudsman for help with federal loans. For private loans or problems with servicers, complaints can be lodged with the Consumer Financial Protection Bureau.