By Drew Cloud

Student Loan Report

With diplomas in hand, the college graduating class of 2016 is off to the races, hoping to cash in on four years of hitting the books. However, with the average college student carrying the weight of $34,000 in student loan debt, it is becoming a race against time as the grace periods for most student loans are coming to an end. Soon the reality of that student loan debt will hit home in the form of monthly payments which will take a slice out of graduates’ paychecks for at least the next 10 years. With the date of that first payment rapidly approaching, here is what recent graduates need to know about student debt repayment.

 Student Loans and Your Credit

A student loan is treated like any other term or installment loan on your credit report, which is a good thing if you are making on time payments. For college grads, it’s an excellent way to build your credit quickly. On time payments are the biggest factor in determining your credit score. Conversely, delinquent payments can wreck your score in a hurry. Should you fall behind on your payments, your account could be turned over to a collections agency, which is another black mark on your report. Any negative reporting, such as late payments and collections, will remain on your credit report for seven years making it very difficult to obtain new credit on favorable terms.

What makes student loan defaults worse than credit card or other types of loan defaults is that student loan debt can be recovered through wage garnishment without a legal judgment. Many credit card defaults never reach the point of lawsuits in which creditors can obtain judgments to recover debt through wage garnishment. With student loan defaults, wage garnishment is almost an automatic. Plus, the garnishment will further taint your credit report for seven years. Your credit score will plummet.

Put Your Student Debt Payment Plan in Place Now

In the time remaining before the grace period ends, graduates would be well-advised to put a serious debt repayment plan in place. If you are fortunate enough to land a great-paying job, the goal should be to pay down the debt as soon as possible. However, if your budget is going to be strained by student debt payments, there are some options available that can help you stretch your income a little further until your income increases.

 Student Debt Consolidation

 Student Debt Consolidation has long been an option for students to combine multiple federal student loans into a single loan amortized over a longer period of time. Borrowers can go to the National Student Loan Data System to see if their loans qualify for consolidation and how the process works.

Benefits of Loan Consolidation

When you consolidate multiple student loans into one, there are a couple of things that happen that can usually result in a lower monthly payment. First, where most student loans are variable, meaning the interest rate fluctuates with market conditions, a consolidated loan is issued with a fixed rate.

Secondly, the new loan is amortized over a 20 o 30 years which will extend your payment period well beyond the standard 10-year period for federal loans. While this will have the effect of increasing your long term interest costs, it could also reduce your current monthly payment to make it more manageable. As your cash flow improves, you will be able to pay down the principle which will reduce your total interest costs.

Consolidated Loan Repayment Plans

For direct consolidation loans, there are several repayment plans from which to choose, all designed to adapt to varying financial situations.

Standard Repayment Plan

A fixed interest rate, fixed payment plan with a $50 minimum that is paid over 10 to 30 years depending on your total indebtedness.

Graduated Repayment Plan

Your minimum payment starts out low and then increases every two years over a 10 to 30 year period. The lowest minimum payment is the amount of interest that accrues monthly.

Extended Repayment Plan

For direct loans over $30,000 the length of the payment period can be extended to 25 years using either the fixed monthly payment option or the graduated monthly payment option.

Income Contingent Repayment Plan

Monthly payments are extended for up to 25 years and are based on annual income, loan balance and family size.

Income-based Repayment Plan

For borrowers experiencing some financial hardship, the length of the loan can be extended up to 25 years, and the monthly payments are based on annual earned income and family size.

These programs may not be the complete panacea some of the more distressed student loan debtors need, but they do offer an opportunity to avoid falling behind on payments and protecting your credit. As a measure of last resort for people already in default, the government, through the Higher Education Opportunity Act, can provide one-time default relief; however, there are a lot of strings attached. The key is to contact your government or private lender as soon as you know you’re in trouble.

Student Loan Refinancing

Another option for graduates, is student loan refinancing. With refinancing, there is the potential to lower your monthly payment amount by lowering the interest charge and/or by extending the loan term. This is accomplished by taking out a new loan to pay off all existing loans. Assuming you have built a solid credit history during your period in school and shortly thereafter, you could be able to qualify for a low fixed rate which can be locked in for a long period of time. You could also have a parent with a solid credit history co-sign for the new loan which can improve your chances of getting a lower fixed rate.

Student refinancing loans are private loans offered through direct lenders, marketplace lenders and student aid agencies. Unlike most lenders, student loan consolidation companies do not charge any application, origination, pre-payment, or other fees. Graduates considering refinancing their student debt should consider some of the possible drawbacks, including

• Refinancing any federal loans would preclude the use of any of the repayment options available, such as income-based repayment plans.

• Refinancing requires the graduate qualify based on their credit history. It may require a co-signer to obtain the lowest possible interest rate.

• Loan forgiveness options available with federal loans could be lost.

Graduates considering either option should do so with a long-term strategy in place to accelerate their loan payments as their income increases.

The Student Loan Report is a content partner of The Port Arthur News providing news and commentary. This content is produced independently of The Port Arthur News.