College graduates should plan now to pay back student loans

USA Funds suggests four steps to successful student-loan repayment

College graduates should plan now to pay back student loans

INDIANAPOLIS — As members of the collegiate class of 2001 collect their diplomas, many also face the prospect of paying back the student loans that helped finance their college degrees. USA Funds^®, the nation's largest education-loan guarantor, recommends that graduating college students take steps now to prepare for that first student-loan payment.

Students who took out loans under the Federal Family Education Loan Program (FFELP), the largest federal source of student aid, typically have a six-month grace period following graduation before their first student-loan payment is due.

"A few minutes of planning now can ensure that graduates start off on the right track in repaying their education loans and avoid the consequences of student-loan default," says Carl C. Dalstrom, USA Funds president and CEO.

USA Funds recommends that graduates take the following four steps to successful student-loan repayment:

Step #1: Find out how much you owe. Students often underestimate their outstanding college debt. Some students fail to maintain complete loan records; others forget that interest accumulates on their unsubsidized loans while they attend school. Lenders and schools provide information to students about the amounts they have borrowed. Graduates should gather this paperwork and calculate the total amount they will have to repay. Students who have lost track of their paperwork can use the free "LoanLocator" service of the National Student Clearinghouse - www.loanlocator.org - to obtain the name and contact information for their loan provider.
Step #2: Determine how much you can afford to pay on your student loan each month. Graduates who already have landed their first job should have some idea of their starting pay. Students who have not yet obtained employment can consult with their school's placement office about starting salaries for jobs in their field. To calculate an affordable monthly student-loan payment, students should take their annual starting salary (or estimated salary) and divide it by 12, then multiple the result by 0.08 and also by 0.1. These two numbers will provide the maximum range of monthly student-loan payments that most borrowers can comfortably afford. Education lenders generally recommend that student-loan payments not exceed 8 percent to 10 percent of the borrower's gross monthly income. For example, graduates with starting salaries of $25,000 generally can afford monthly student-loan payments of no more than $167 to $208.
Step #3: Devise a repayment strategy. Online student-loan repayment calculators - available through Web sites such as /www.collegeanswer.com, www.mappingyourfuture.org, www.usafunds.org - help graduates calculate what their monthly payment would be under various repayment options. Approximately 90 percent of student-loan borrowers use the standard repayment plan, which consists of equal monthly installments over a period of up to 10 years. Flexible repayment plans, including graduated, income-sensitive and extended repayment, also are available. Borrowers with total education debt in excess of $7,500 might consider loan consolidation, which bundles multiple loans into a single monthly payment and extends the repayment period. Using these options, borrowers may be able to reduce their initial monthly payment amounts to an affordable level. There is an additional cost to these flexible repayment plans, however. Because payments are lower initially and may be made over an extended period, total interest costs will be higher. If these options fail to provide affordable payments, borrowers should explore with their lender or loan servicer deferment or forbearance provisions, which allow temporary suspension or reduction of monthly loan payments.
Step #4: Make sure your school and lender or loan servicer know where you are. Students who move following graduation should notify their school and their lender or loan servicer of the address change. Otherwise, graduates might not receive important information about their student-loan accounts. Borrowers who fail to notify their school or lender of address changes are at significantly higher risk for student-loan default.

Headquartered in Indianapolis, USA Funds annually guarantees $9 billion in education loans in all 50 states and serves as the designated guarantor for nine states: Alaska, Arizona, Hawaii and the Pacific Islands, Indiana, Kansas, Maryland, Mississippi, Nevada and Wyoming.