Q: I’m graduating from school this month and, aside from the relief of making it through four years of college and several more years of graduate school, I’m worried about paying back my student loan debt. I don’t have a job yet (although I have several interviews lined up) and I owe about $60,000 in debt. What are my options if I run into trouble? — C. Lieu, Lansing, Mich.
A: Welcome to the club, if that’s any solace.
The New York Times is already calling the student loan debt market the next sub-prime-like debt fiasco facing borrowers — and probably with good reason.
About 10% of all college graduates in 2007-2008 left school with a student loan debt burden of more than $40,000, according to the College Board. The Board estimates the median debt amount to be approximately $22,380. The Times reports another study — this one from the Project on Student Debt — which says that over the same two-year period, 206,000 students graduated from college with more than $40,000 in loan debt; that’s nine times higher than back in 1996.
So the good news is that you’re hardly alone, and you have some hope of lining up a good job. That’s no mean feat in this economy, where only 41,000 new private industry jobs were added to payrolls in May, according to today’s U.S. Labor Department jobs report.
The bad news? You need a contingency plan if you run into immediate trouble paying your loans.
Our advice is this. Go back and re-read your loan terms from your borrower. Make sure you know what’s expected of you (monthly payback terms, interest rate, minimum payments — things like that). Also make sure to get a contact name — you’ll want to build a relationship with your borrower if you get into trouble, and keep that person apprised of your progress as you pay down your loan.
Lenders hate it when borrowers hide bills under the couch cushions — it’s much better to be open and honest about your situation. A good relationship with your lender can really help there.
Since you’re just graduating now, you’ll have six to nine months before you have to start paying your student loan debt. That gives you time to plan ahead. If you haven’t already, let your parents know that any graduation gifts coming your way should be in the form of cash. You can use that cash to pay down your debt.
When you do land a job, set up an automatic payment plan with your student loan lender. Banks and lenders love automatic payments — it’s less overhead for them. But in doing so, there’s a good chance that you can cut some of the interest rate off the loan by setting up payments automatically — lenders are amenable to that, but sometimes you have to push them to get the deal.
Down the road, any bonuses or raises from your employer should go right to your loan debt. There’s no rule that says a raise must be used to buy a new big-screen television or a trip to Cancun. If you can double down payments in a given month, do so — the faster you pay down the debt, the less you’ll pay in interest rate charges.
If you find you just cannot make the payments, let your lender know right away. Programs like loan forbearance allow you to buy some time if you can’t pay your loan — but the interest on the loan will keep accruing in those circumstances.
The fact that you’re acknowledging a potential problem paying back your loan is to your credit. Just stay ahead of the problem as much as possible, keep your lender in the loop, and plow as much income as you can toward your loan, and you’ll survive a tough situation.
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