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Wednesday, May 23

Student Loan Payback Strategies

The rising cost of college is a topic of national attention. But for many young adults, a college education is worth any cost, as it is a prerequisite to getting a good-paying job in today's global information economy.

Borrowing to pay for college makes sense for many, since a college education is viewed as an investment in human capital that can increase your lifetime earnings potential. The typical college grad earns about 60 percent to 70 percent more than the typical worker with only a high school education. And by the time the worker with a college education is age 33, his or her higher pay has covered the cost of four years of college tuition and costs.

But, a recent poll of more than 1,500 college graduates between the ages of 12 and 35 by Mathew Greenwald Associates gives some insight to the challenges faced by college grads as they struggle to pay back their student loans. Because of the burden of such payments, 44 percent said they delayed buying a house, 28 percent postponed having children, 27 percent skipped medical or dental procedures, and 32 percent said their loans forced them to move back into their parents' home or live there longer then they expected.

Students graduating with loans are suddenly thrust into the world of learning about budgeting and debt repayment — something they probably didn't study in school. But there are some steps you can take to make the process of student loan repayment more manageable.

Students graduating with loans to repay are advised to follow these steps:

Know What You Owe: Due to the way college costs are financed, students typically end up with five to seven loans at graduation. Each loan can be for a different amount and carry a different interest rate. You can track down all of your federal student loans at the National Student Loan Data System, whose Web site enables students to access all their federal student loans (Title IV loans and grants such as Stafford Loans, PLUS Loans, Pell Grants, etc). For private loans, you need to contact each lender to get balance, interest rate and payment information.

It's important to take an inventory of all of your loans to know when you must begin repayment. Most loans (federal and private) will be in deferment for the first six months after graduation, which means you do not have to make payments during that time. You will need to know when payments are due, and how much the payment is for each loan. Also, you'll want to update your contact information with the lenders (you may have moved) and get updated contact information on them, since some of your loans may have been sold to another company, which will now collect the payments. This is important, so you will receive important notices and know where to send payments.

Calculate Consolidation Loan: One way to make your student loan payments more manageable is to consider a transaction called "loan consolidation," in which individuals with qualifying student loans can combine all their loans from various lenders into one single loan with a single lender.

One of the main benefits of "student loan consolidation" is a smaller monthly payment, which is typically the result of stretching out payments over longer period of time and receiving discounts provided by lenders who are competing for your loan.

Loan consolidation also provides for simplicity, enabling you to go from having to make payments to multiple lenders to making a single payment to a single lender on a single loan.

You can also gain some certainty: When you replace all your variable rate student loans with one single loan with a fixed interest rate, you'll have the certainty that your rate and payment will be fixed and will not change for the life of the loan.

Before you shop around for a consolidation loan, you'll want to check to see if this will mean a lower interest rate: The rate for the consolidation loan is the weighted average of the variable rates on your existing loans, typically rounded up by the next eighth of a percentage point. Use the calculator tool at SallieMae.com to run the numbers for your situation, and make sure to compare the interest rate discounts between the existing and consolidation loans.

Choose Manageable Payments: One of the most important things to do is set up a repayment plan for your students loans on a schedule that you can manage; since you will be living with these payments for ten years or more, you need to make sure you can afford to make them on-time.

There are four categories of repayment options that apply to most consolidation loan programs:

# Standard Repayment Plan: Provides for a fixed monthly payment for a maximum of 10 years.

# Graduated Repayment Plan: Monthly payments are initially set to a lower amount for the first several years (typically two to five years). After that, payments increase to provide for repayment over ten years. The concept is that you can begin with a lower payment, and after your income increases, your payments will rise. You will pay more interest over the life of the loan than you would with the standard repayment plan.

# Extended Repayment Plan: Provides for a fixed monthly payment schedule ranging from 12 to 30 years, depending on the amount borrowed. The monthly payment will be smaller than the standard repayment plan, but you will pay more interest over the life of the loan.

# Income-Contingent Repayment Plan: Monthly payments are based on the borrower's income, family size, and total loan amount, and can be repaid over up to 25 years.

While loan consolidation for many may seem like a no-brainer, the repayment plan requires a little more thought. When deciding, consider this advice: Commit to a repayment schedule that allows for the payments to be no more that 15 percent of your monthly gross income. For students with a high debt burden and low initial earnings, such as lawyers or doctors, this may be impossible. But also consider the possibility of rising income in your choice of repayment schedule.

So, if the higher payment of the standard repayment schedule cramps your cash flow, leaving nothing to pay down credit card debt or to contribute to an employer's retirement plan, consider the lower payments offered by the graduated or extended repayment schedules. The downside is that, if you never make additional payments on these extended schedules, you will have paid several thousand dollars in additional interest over the life of the repayment on a typical student loans. But, if your income rises later and there is extra cash flow, you can make extra payments on your student loans early without any penalty, and save on additional interest.

The graduated and extended payment plans offer the payment relief of lower payments early-on and the flexibility later to pay more when it may be more affordable to do so. Another way to look at it is this: If you can get a 30 year mortgage at the same low fixed rate that applies to a 15 year mortgage, you would be advised to take it — you can always choose to make an additional payment or two each year when you can, and doing so would result in paying off your 30 year mortgage in about 15 years.

Why Consolidate Loans Now?

During the past few years, the reason to consolidate before July was to lock into the lower rates on existing loans before these rates were set to rise. The rate on current loans is important, since a consolidation loan interest rate is based on the rates of the existing loans.

But because rates haven't moved much since last year — and in fact, the recent trend is slightly lower — the rates probably won't be much different for loans consolidated in June or July this year; in fact, the rate may be slightly lower in July.

But there may be several good reasons to act now and consolidate student loans before July. For example, if your loans are in deferment, or grace period, that is set to end soon; due to special rate discounts that apply only to deferred loans, you may get a better rate on consolidating loans in deferment now than you would by waiting to consolidate after deferment ends. There may be other financial reasons to consolidate sooner rather than waiting, such as consolidating now to get payment relief or to help to qualify for a home mortgage.

Some loan providers, such as Sallie Mae, will allow you to apply for consolidation while in a grace period and delay processing your loans until the end of your grace period. They will also allow you to submit your application for loan consolidation now and they will offer to wait to process your consolidation loan on either June 30 or July 1, to get the best rate available.

How and Where to Consolidate

Since loan consolidation is allowed only once, you have to consider your options carefully. And even if you have only one loan, you can use a consolidation loan to replace it just to lock in a low fixed rate.

The first step is to gather the information on all of your loans, including the lenders, account numbers, amount and interest rate for each one.

Next, contact the companies that service your loans, because the federal loan consolidation program requires that you work with one of the lenders that provided one of your loans. You should contact each lender because, even though each should offer the same interest rate set by the government rules, their terms can vary, as can other valuable discounts that are offered.

Some consolidation loan providers will offer to reduce your interest rate by more than one percent after you make the first 36 payments on-time. Others offer cash rebates for those who make the first six payments on-time. Many providers offer to cut your rate by a quarter percent if you sign up to auto-debiting the loan payments electronically from your bank account. There are no fees, no credit checks, and no collateral required, so steer clear of any provider who states otherwise.

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