Student Loans Series: Part 1

Photo by Steve Buissinne via Pixabay

The greatest test of a student’s college career is upon us: it’s time for May 2018 graduates to begin repaying student loans. The average college graduate leaves school owing roughly $42,000, in payments of $350/month for ten years.

The problem, say financial aid officers, is that many students are uninformed about their loans, how much they owe, and their many repayment options.

Some schools, like the University of South Carolina and Clemson,provide all students financial literacy workshops and consultation. Others may not have the institutional resources, like College of Charleston, where nearly half of students borrow for college, according to the National Center for Education Statistics.

For students who graduated in May and didn’t go on to graduate school, their six-month grace period ends now. They may have received a shock in the mail – a demand for repayment to begin. Robert Kersey, Director of Financial Aid at College of Charleston, says CofC students are generally well-informed about their loans, but may not fully understand the range of criteria for forbearance of the loan or the variety of repayment options available to them.

Several repayment options allow borrowers to tailor their loan to their particular circumstances:

  • The standard federal student loan runs ten years and can be extended up to 25 years. The longer the loan, the lower the monthly payment but, the more interest a borrower will pay in the long run.
  • Graduated repayment plans allow borrowers to backload their repayments so they are paying off less at the beginning when their earnings may be low and more as their income increases.
  • Income-driven repayment plans peg the monthly bill to income – generally 10% of discretionary income – for up to 30 years. Any remaining balance after that time is forgiven. This option may be particularly attractive to those who enter low-income fields like early childhood education and non-profit management.
  • Public service loan forgiveness theoretically erases any balance left after ten years for full-time employees of government, non-profits and certain not-for-profit employers like hospitals. In practice, the government has been denying the vast majority of these claims, mostly because of technical and paperwork issues.
  • These options are an overview of plans for direct federal student loans. There are many more options within each plan, a plethora of caveats, and many other kinds of loans that have their own rules.

A recent article in the Wall Street Journal found that students are making mistakes that cost them money in their student loans. For example, loan servicers have difficulty finding students who use an address they no longer live at or fail to update a school email address they no longer use. Former students may find themselves in arrears for payments and added interest even before they knew their loans were becoming due.  Credit ratings can be damaged without warning.

Many students who return to school at least half-time fail to notify their lender and claim a further deferment of their loan repayment. Others neglect to enroll in automated payment plans that can reduce the interest rate and simplify loan repayment.

Nearly every question a borrower might have about federal student loan programs is covered at Federal Student Aid’s website.