Last June's college graduates face a tough choice this month. That's when the automatic six-month deferment on their student loans expires, forcing them to start repaying the money or beg for additional time.
Never have students been so deep in debt and so unprepared to pay.
The average student is carrying a record debt load of more than $23,000, according to a just-released report by the Project on Student Debt. Meanwhile, unemployment among college graduates ages 20 to 24 is the highest in recorded history, at 10.6 percent.
"With debt and unemployment at record levels, college graduates may feel stuck between a rock and a hard place," said Lauren Asher, president of the Institute for College Access and Success in Berkeley, Calif., a nonprofit advocacy group that is affiliated with the Project on Student Debt.
Graduates do have options that could make the debt more manageable, she added. But figuring out the best option with student loans, particularly loans with special bells and whistles, can be mind-boggling, said Lynn O'Shaughnessy, who writes the College Solution blog.
"College graduates have to be really smart about their loans because it is so easy to get in trouble with student debt," she said.
How do you make smart choices?
SEPARATE YOUR DEBT
If you have been borrowing all the way through school, you probably have a variety of loans with different interest rates and terms. Before considering repayment options, you need to examine the type of loans you have and separate your loans into piles. Gather your documents and sort them by loan type:
Perkins loans
Subsidized Stafford loans (the federal loans that you were granted because you had financial need)
Unsubsidized Stafford loans (federal student loans that anyone can apply for)
Stafford loans that you got before 2006
Why should each of these loans be in different categories? Because Perkins loans are issued at extremely low interest rates and offer deferment and loan forgiveness programs that are not available for other types of loans.
If you consolidate a Perkins loan with other types of student debt, some of these special features are lost, said Edie Irons, a spokeswoman for the Project on Student Debt.
Subsidized Stafford loans should be separated because the government pays the interest on them when you are in school and when your loans are in deferment, which means that deferring these loans when you don't have a job costs you nothing.
Unsubsidized Stafford loans, on the other hand, accrue interest while you are in school and while the payments are being deferred. As a result, the longer you wait to pay on them, the more you owe. If you can't pay back all your loans right away, these are the loans you should pay back first.
Finally, Stafford loans that were secured before 2006 are issued at variable interest rates that are at rock-bottom levels, now less than 2.5 percent. Consolidating these loans allows you to lock in that rate for the life of the loan.
Source
Monday, February 15, 2010
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