Graduates should be aware of repayment options and rising interest rates, as well as the importance of communicating with their lender.
Ignoring phone calls and paperwork often seems like a short-term solution, but without that simple phone call, loans will go into default, says Megan McLaughlin, a UB graduate and representative from the Federal Loan Source.
"They will garnish your wages," McLaughlin said. "They will take your income tax return."
Low entry-level salaries for graduates make repayment seem grim, but lenders will work with borrowers on options for repayment. Graduates may qualify for a loan deferment or put loans into forbearance, if ineligible for a deferment.
Forbearance will temporarily postpone or reduce payments, and can be applied even after loans have entered repayment.
"You have three years of forbearance, however you choose to use it," said McLaughlin. "Nobody wants you to go into default. They will try their best to work with you to make your payments."
Stafford subsidized and unsubsidized Federal Family Education Loans (FFELs) offer a 6-month grace period for job search upon graduation, but students graduating this spring may face higher interest rates if they wait too long to consolidate loans.
The current interest rate of 4.7 percent may raise to a projected 6.8 percent this July, according to McLaughlin.
"The exact increase won't be announced til May," she said. "But, it's definitely going to go up and that's something for students to carefully watch."
The federal government sets new interest rates every July, but consolidation will lock in a lower rate for the life of the loan. Borrowers do not have to enter repayment to consolidate, according to McLaughlin.
"If they wait, that waiting will lose them $5,000 to $6,000, or even more, depending," she said. "You can consolidate and put loans into forbearance or deferment. There are ways to delay repayment until you have a job."
McLaughlin said that graduates often make the mistake of assuming their loans are consolidated, just because they're paying one monthly payment.
"Servicers can be kind of sneaky," she said. "There may be one payment, but at a variable rate, instead of a fixed rate. Make sure your loans are consolidated."
Consolidation companies sometimes offer interest rate reductions or cash back incentives.
"Lenders are not going to offer this off the bat," said McLaughlin. "Call the lender and ask."
Some companies will offer a .75 percent reduction after 12 on-time monthly payments, or one percent after three years of on-time payments. Every little bit saved on interest is good, when dealing with thousands in loan dollars.
Cash back incentives can be deceiving, however. For example, a three percent cash back option based on principle can be just a few hundred dollars, and it doesn't help if it's not applied to the loan, according to McLaughlin.
"If you want to save money and get a loan repaid sooner, pay a little more each month," McLaughlin said. "It can save a thousand in interest."
Graduates entering the military, Peace Corps, certain nursing careers, or teaching positions at designated schools serving low-income families might qualify for a FFEL loan cancellation, but beware of thinking of bankruptcy as an option.
"If you go into bankruptcy, they'll put a freeze on your account, but you will still have to pay it back," said McLaughlin. A surrounding bankruptcy only discharges loans in very rare cases.
"I've never seen it," she added.
Defaulted loans require the entire balance due immediately. Deferment options will be lost and the account turned over to a collection agency affecting credit rating. In some states, debtors may also be unable to obtain a professional license, according to McLauglin.
Federal Perkins Loans give a 9-month grace period for job search upon graduation, but FFEL PLUS or Direct PLUS loans offer no grace period.
Borrowers typically choose one of the following payment options:
YenStandard repayment plan - pay a fixed amount each month until loan is paid in full. Typically a 10-20 year loan.
YenExtended repayment plan - borrowers pay a fixed amount each month until loan is paid in full. Typically 25 - 30 years. Greater interest cost in the end, but it will lower monthly payments.
YenGraduated re-payment plan - payments start out low, then increase in stages.
YenIncome contingent re-payment plan - monthly payment will be based on adjusted gross income.
