Managing Student Loan Debt - The Clock Starts Now

ALBANY, NY (06/08/2010)(readMedia)-- The ink is barely dry on college diplomas, but the clock is ticking on the six-month grace period for federal student loans. Recent college graduates are reminded that repayment on their federal student loans will begin in November or December.

New grads are encouraged to review their loan repayment options and understand their rights and responsibilities as borrowers. The New York State Higher Education Services Corporation (HESC), the state's financial aid agency that helps people pay for college, offers guidance in preparation for repayment at its Web site, HESC.org.

Create and stick to a budget

Creating a budget will help you live within your income and manage your payments. There are a number of tools available to help establish your budget; remember to meet your "needs" first, then your "wants" as you can afford. Your expenses should be less than or equal to your income. Revisit your budget regularly to make adjustments as necessary.

Choose a repayment plan

When it's time to start repaying your student loans, you can select a repayment plan that's right for your financial situation. Generally, you'll have from 10 to 25 years to repay your loan, depending on the repayment plan you choose.

• Standard repayment
  In this repayment plan, you pay a fixed amount each month. The minimum monthly payment for this option is at least $50 or more if necessary, to make sure you do not take longer than 10 years to back the loan.
  
  This is the most cost effective plan as it minimizes the amount of interest you will have to pay.

• Extended repayment
  Extended repayment is intended for borrowers who owe a minimum of $30,000 within a specific federal student loan program. Payment amounts are either fixed or graduated and can have a maximum repayment period of 25 years.
  
  This plan is generally more expensive than the Standard plan because the loan balance decreases more slowly while interest continues to accrue.

• Graduated repayment
  This repayment plan starts out with low payments that increase over time; payments increase usually every 2 years. You must repay the loan within 10 years; at a minimum, your payment must cover the interest that accrues on your loan between payments.
  
  Graduated repayment is more expensive than the Standard plan because more interest accrues early in repayment. Your earlier monthly payments are lower than later payments, causing the loan balance to decrease at a slower rate.

• Income sensitive repayment
  Income-sensitive repayment is based on your annual income at the time you begin repayment. As your income increases or decreases, so do your payments. Your income status is reviewed annually and you have 10 years to pay your loan.
  
  This plan is more expensive than the Standard plan and usually more expensive than the Graduated plan. More interest accrues because you are taking longer to pay down your principal balance.

• Income-based repayment
  Known as IBR, your payments are based on your monthly income and family size as compared with the national standard poverty level.
  
  This repayment plan is intended for individuals with exceptional financial hardship or who are pursuing careers in public service. The loan term may exceed 10 years and you may qualify for cancelation of any outstanding balance of your loan if you repay under this plan and meet certain other requirements.

Know Your Lender or Servicer

Since you took your student loan, your original lender may have contracted with a servicer or sold your loan to a secondary market company. Either way, you will still have the same rights and responsibilities outlined in your original loan. The National Student Loan Data System (NSLDS) can provide you with a history of your federal student loans.

Start Repayment

After the grace period, you'll begin repaying your federal student loans. You can prepay part or the entire loan principal at any time without penalty, saving you money on interest. Ask your lender to apply any prepayments to the loan principal. Most lenders and servicers offer online payments or automatic deductions from your checking account and may offer an interest discount if you agree to use these services. Check with your lender or servicer for details.

Keep in Touch

Remember to notify your lender in writing if you change your name, address or phone number. Keep copies of all correspondence in your financial aid file, which should include all paperwork relating to your loan.

What if You Can't Pay?

You may be unemployed, underemployed, ill or have other extenuating circumstances creating repayment problems. Ignoring your student loans will create a more serious situation later.

If you fail to repay on time, your loan becomes delinquent. If you stay delinquent, you will default and the entire loan balance becomes due. Don't let payment problems get out-of-hand…work with your lender at the first sign of difficulty. You may be eligible for a deferment, which delays payment or, your lender may agree to a forbearance, which may temporarily suspend or reduce your payment.

Managing your student loan intelligently is an important step in meeting your obligations, establishing a good credit history and safeguarding your financial future.

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