Congratulations to the class of 2016, your hard work and perseverance has paid off. You are newly minted graduates and may be facing a variety of decisions surrounding your life and career that you feel totally unprepared to make. Should I take that crazy job teaching English in Tibet, or the stuffy office gig with a 401 (k)? Mom and dad said I could move back home, but living with my friends in a sixth-floor walk- up apartment just seems like more fun. Do I need to start saving for retirement already, oh, and what about my student loans?
The decisions that you make now can impact you for a lifetime, so while you’ll have plenty to figure out on your own, managing your student loans need not be stress inducing. A good first step is to get to know the enemy. You can cozy up by visiting the Federal Student Aid website at https://studentaid.ed.gov. From here, you can create an account and view the details of your loan(s), including their current status, outstanding balance and repayment options. The site provides a clear and concise summary of the various types of student loans and repayment programs available.
Now that you are better acquainted, it’s time to draw up your battle plan. Those with federal education loans can select between a variety of repayment options that range from 10-30 years, with level or increasing payments. Additional income-based and pay as you earn plans are also on offer, as is the opportunity for loan forgives under the Public Service Loan Forgiveness Program.
Consolidation of your loans is another arrow in the quiver that you should be familiar with. Federal education loans may be combined into one direct consolidation loan with a 10 to 30 year repayment term. The interest rate is a weighted average of your previous rates, and is not based on your credit history. It is important to remember that consolidation doesn’t lower your interest rate. Consolidation, however, can make certain loan types that aren’t otherwise eligible for forgiveness and income-driven repayment programs eligible because of the consolidation. The best candidates for a federal loan consolidation are those with a limited credit history and cash flow, or those that may become eligible for loan forgiveness.
Student loans may also be refinanced with a private lender, but recent graduates should exercise caution if exploring this option. Private loans are based on your credit history, so those with stable income and a good credit score may be able to reduce their interest rate and monthly payments. Federal education loans that are refinanced through a private lender are no longer eligible for income based repayment plans or the Public Service Loan Forgiveness Plan. Private loans are best suited for those with good credit and an established career path.
Now that you’ve aced student loan repayment, it’s time to go out and conquer the world.
John Male, CFP®
G&G Planning Concepts, Inc.