The average undergrad leaves college with $20,000 in student loans and can easily rack up another $20,000 or more for grad school. Carrying that much debt can be scary in the best of economies but especially in times like these, when both other credit and jobs are tight. If you, or a student of your acquaintance, are in that situation, here are some steps to keep you out of hock:
1. Lock it in. Interest rates are low now, so if you have a variable rate federal student loan this isn’t a bad time to “consolidate” to a fixed one, says Mark Kantrowitz, founder of student loan information site Finaid.org. Interest rates could fall further in the short term, but they’re expected to rise within the next couple years, as the cost of the financial bailouts hits Uncle Sam’s balance sheet.
2. Ask for a break
—Borrowers who are encountering difficulty can request a deferment of up to three years due to economic hardship, military service, or trouble finding full-time work. In the case of federally subsidized loans, the government pays the interest during the deferment period. If you don’t qualify for a deferment, you can ask for forbearance, which is a temporary reduction or postponement of payments for up to three years. Unlike some deferments, interest always accrues on forbearance. Borrowers who are in a medical or dental internship or residency will be automatically granted forbearance, as will any borrowers whose loan payments represent 20 percent or more of their monthly income. Visit the Department of Education’s site for specifics.
—You may also be able to switch to an alternate repayment plan, such as extended repayment. That will reduce your monthly payments by increasing the loan term, but it will also mean paying more total interest over the life of the loan.
—For federal loans there is a new Public Service Loan Forgiveness program, which pays off the loan balance of any loans in the Direct Loan program after 120 monthly payments if the borrower is employed full time in public service. However, the payments must have been made after October 1, 2007, so you won’t actually benefit until 2017. Teachers who work in low-income schools or whose subjects face teacher shortages can currently apply for cancellations or deferments.
—Congress also recently passed a bunch of loan forgiveness programs for various professions, but it remains to be seen if they will be funded.
For more on avoiding default go to Finaid.org or the National Consumer Law Center’s Student Loan Borrower Assistance Project.
Obviously, before things get so dire that you skip paying your loans, you should try to cut back on spending, put together a budget (ugh) and, if necessary, talk to a credit counselor. —Chris Fichera