The diplomas have been framed, the caps and gowns are in mothballs. Now comes the first payment on your student loan.
Most student loans have six-month grace periods that are ending for May and June grads, with those first payments usually due in October or November. Finding out the exact date--and the amount of the payment--is on the borrower. Student loan servicers, who are being paid by the Department of Education (ED), can't be counted on to give their customers a heads-up. Borrowers have to contact servicers to ensure that they have accurate information on when and where payments have to be made.
They should also pick a payment plan at ED’s website through the student loan estimator to determine the lowest interest rate for which they qualify. Those who don’t will be put into the ten-year plan, which comes with fixed monthly payments. Lower monthly payment plans are available but those loans are more expensive as the time it takes to pay them off is extended.
Members of the Class of 2015 started their working lives with probably more student loan debt than ever--just over $35,000 by some estimates. That's about $2,000 more than the Class of 2014 and twice the amount new college grads owed two decades ago--even when inflation is taken into account.
Refinancing has been a topic in the industry for borrowers and lenders alike, but options are limited following the defeat of a Senate bill to re-finance federal student loans earlier this year.
Refinancing involves taking out a completely new loan, and refinancing a federal loan means switching to a private lender. People who refinance their federal loans lose access to income-based payment (IBR) plans and the Public Service Loan Forgiveness options. Not all federal loans have these options, however.
"Federal Parent PLUS loans are generally not eligible for IBR or PSLF," said Mark Kantrowitz, a financial expert.
An exception is Parent PLUS loans that entered repayment on or after July 1, 2006.
“Those loans aren't directly eligible for the income dependent repayment plans, but if consolidated into a federal direct consolidation loan, the consolidation loan is eligible for ICR (income contingent repayment) only," Kantrowitz said.
In the era of the six-year BA, it’s not unusual for students to have ten or more student loans. Kantrowitz recommended checking the National Student Loan Data System’s website to get an accurate tally on what you owe.
He also noted that private loans offer both fixed and variable rates.
"Given that the Federal Reserve is likely to start increasing interest rates soon, borrowers should prefer fixed rates,” he said, which will likely have shorter repayment terms.
The Department of Education will typically make Stafford loans to newly-minted high school grads without checking credit scores. But easy money becomes hard when it comes time to pay off the loans.
"Students are unlikely to qualify for a lower interest rate on their own,” said Kantrowitz. “For refinance, it takes a few years after graduation for an individual’s credit scores to improve enough to qualify for a lower rate if credit is managed responsibly." Having a creditworthy co-signer will give you a leg up. Stellar credit scores and good incomes are a must-have. People with late or missed payments need not apply.
Still, the glut of loans and the continuing low interest environment has brought student loan aggregators to the market who match borrowers with lenders.
"The ideal student loan refinancing candidate has a good financial profile—a steady income or an employment offer letter, no negative items in their credit history and a balanced debt-to-income ratio," said Stephen Dash, CEO of Credible, a San Francisco-based website in the student loan refinancing space. "Those without an established credit history or a less than perfect record can apply with a co-signer to boost their chances of eligibility."
People with STEM and finance majors will do better than fine arts majors in terms of salaries, but Dash states that "most lenders offering student loan refinancing don’t favor particular majors, but often have different maximum debt thresholds based on degree level and degree type when assessing eligibility." For instance, a borrower with a bachelor’s degree may be eligible to refinance a lower total loan balance than a borrower with a law or medical degree, he says.
”There are certain benefits and protections for federal student loans that now have few equivalents in the private student loans space," Dash acknowledged, "including certain federal repayment and forgiveness programs.
Dash said lenders on Credible's platform offer benefits similar to Federal loans. Others are unique to the private lending space. “Citizens Banks will allow borrowers who enroll in a new degree program after refinancing to defer payments up to 48 months," he said. "CommonBond offers forbearance due to economic hardship similar to what is available with Federal loans. Cordiagrad will allow married couples to combine their loans together into a single payment.”
He added that borrowers should be careful to read each lender's disclosures, think about what benefits they value before refinancing and get appropriate advice.