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College grads need to study repayment options for loans

| Sunday, Aug. 19, 2012, 9:00 p.m.

Really, $1 trillion in student loans for a bunch of tuition, used books and Ramen noodles? But now that many college graduates — and those who left college with loans but no diplomas — have the debt, how do they pay it off?

Oddly, the real trouble can start in the summer as college grads look for jobs, start new lives in other cities and leave college bills behind. Come winter, some students forget they owe the money.

Regular payments for most student loans are required after a six-month grace period, and for many spring college grads, that's November or December.

“Sometimes, they just forget because it's been six months since they graduated,” said Mark Kantrowitz, publisher of FinAid.org and FastWeb.com.

As a result, student loan debt has the potential to be far more burdensome than credit card debt. College grads who are burdened by student loans — and those who borrowed but did not graduate — typically cannot simply file for bankruptcy protection to make student loans go away.

It's essential to review options and not just hope that somehow things work out.

Line up a list of your loans and study various repayment options.

Borrowers with private student loans often reported that lenders would not modify or adjust repayment terms, according to a federal report.

It is easier to find help with federal student debt. But Sallie Mae, a leader in student loans, said some options for private loans exist, such as reduced monthly payments, interest-only payments, extended repayment schedules and temporary interest-rate reductions during a hardship. Options depend on a customer's circumstances, said Patricia Nash Christel, a spokeswoman for Sallie Mae.

If you're taking out loans, remember it is far better to exhaust federal student loans first before obtaining private loans.

Some repayment strategies:

• Know what you owe. See the Student Debt Repayment Assistant at http:/// www.consumerfinance.gov/students/defaultoptions. At this site, you have a direct link to the National Student Loan Database System for Students to find a list of all federal loans made to you.

• Understand there's more than one way to pay off a student loan. What if you're working, but you're not making a lot of money? Say, delivering pizzas?

A graduated repayment plan for federal student loans can offer a way to start off with low payments and have payments increase every two years. The first year's payments can be as low as half of the payment under the standard 10-year plan.

This strategy would cost more money in the long run.

But Patrick Kandianis, co-founder of PayBackSmarter.com in Boston, said a graduated payment plan can create more breathing room in a tight budget.

Consider this example: On $28,000 in student loan debt, the standard repayment would be about $322 a month.

If you switch to a graduated repayment plan, the payment drops by $100 to $222 a month for the first two years.

The payment goes to $270 a month for the third and fourth year. Down the road, payments would near $400 and $500 a month in the last four years of a 10-year plan.

This option works best if you do find a better-paying job or other access to more money down the road.

In graduated repayment, no payment will be more than three times the first payment.

In this example, it would cost about $2,300 more in interest under a graduated plan, compared with a standard repayment plan, Kandianis said. But again, it's a way

to avoid bill collectors.

“The ability to avoid default is probably worth it,” he said.

• What if your other bills are high, and you really have very little to pay toward student loans?

An income-based plan can hold down payments for federal loans. It bases the payment each month on how much discretionary income you have after major expenses. Currently, the payment could be up to 15 percent of your discretionary income.

Income-based repayment is available for all federal loans, not just direct loans. But not every lender offers it, so Kantrowitz said borrowers who want it and find that their lender doesn't offer it can consolidate into the Direct Loan program to get it. http://loanconsolidation.ed.gov.

If the borrower's adjusted gross income is less than 150 percent of the poverty line, the monthly payment is zero. You'd be able to extend payments up to 25 years and the remaining debt and interest would be forgiven after 25 years in repayment.

The downside is that interest is building and you could be digging yourself into a deeper hole.

Many students may have had a chance to learn more about loan options during exit counseling when they graduated. But some skip that course.

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