Credit Basics
As Higher education costs rise, so do debt loads
Getting
through college and earning a degree is hard enough. For many, an even bigger challenge
arrives later: paying for all that education.
As costs rocket higher — tuition, fees, room and board at public four-year colleges
have surged 38% in the past decade — more students have had to borrow enormous sums
to finance college. As a group, they've
been amassing record-high debt, with many
of them needing a decade or more to pay it off.
In the 2003-04 academic year, the latest period for which figures were available,
median debt for those with bachelor's degrees was $19,300, the College Board says.
What to do if you're struggling to pay your student loans?
It depends on the type and source of your loan. You're likely to have a range of
options, including reducing or deferring your monthly payments. Federally backed
loans offer the most flexible repayment terms. By contrast, loans not federally
guaranteed, called private loans, offer the least favorable rules: They often carry
higher interest rates, which usually aren't capped, and fewer borrower protections.
"If you're having trouble making your payments, don't wait until it becomes a problem,"
says Mark Kantrowitz of FinAid.org, a financial aid site. "Call the lender early."
What you don't want to do is default. If you fail to pay for 270 days on a federal
loan or 180 days on a private loan you're generally considered in default (unless
the lender granted you a deferral). Your loans will be turned over to a collection
agency, and you'll have a black mark on your credit record.
If it's a federal loan, the government can sue you, garnish your wages, withhold
Social Security payments — yes, some people are still paying down student loans
after they retire — and take your tax refunds, according to FinAid.org.
Some options to keep on top of your student loan payments:
- Repayment plans
Generally, you have 10 to 15 years to pay off your federal and private loans. You
can seek an extended-payment plan — of up to 30 years — if you need more time. Don't
do that unless absolutely necessary, though, because you'll end up paying more interest
over the life of the loan.
Your payment is based on your total debt, the life of the loan and the interest
rate; you can usually change your repayment plan once a year. Some lenders, such
as Sallie Mae, will let you change your plan more often.
With private loans, you typically can make an identical payment each month, though
that payment can rise or fall slightly with interest rates. Or you could have your
payments rise over time under a graduated plan. Many lenders also let you extend
the repayment period for up to 30 years. That will trim your monthly payments, but
you'll pay more interest in the long run.
Most federal loans offer all those options. They also provide a payment plan pegged
to your income; if your pay rises, so will your payments.
- Deferrals and forbearance
With federally subsidized loans, your loans can be deferred for six months after
you graduate; the government pays your interest during this time. Unsubsidized federal
loans — such as
Even after you've begun repaying, you have the right to defer payments for up to
three years if you lose your job or suffer some other hardship. (If you have a
Borrowers with the highest debt loads and those with the lowest salaries are most
likely to defer paying on their federal loans, the Education Department says.
You don't have such flexibility with private loans. You'll often get a six-month
grace period after graduation. But you'll be charged interest — typically, at far
higher rates than with federal loans — until repayment begins. And if you fall on
hard times, it's up to the lender to decide whether to let you postpone payments.
Alex Guzzetta, 22, owes more than $90,000 in student loans. He has no problem making
the $110 monthly payment on his federal loans, but says he can't afford the $600
due monthly on his private loan, which he'll have to start paying in the next month. He's received a six-month forbearance on the private loan but isn't sure the lender
will extend it. "You're at the mercy of the lender," says Guzzetta, an accountant
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