Dealing With Student Loan Repayment

When you apply for financial aid, of course you hope that you will be able to secure a grant or scholarship. Why is this so? Because neither of these financial aid options requires you to pay back the proceeds. Obtaining a grant or scholarship is like winning educational funding in the lottery: it's strictly a gift to you, unlike a loan, which means you incur personal debt.

Many student loans defer repayment of your debt until you have completed school and had time to find a job. Therefore, a student loan can give you a deceptive feeling of lack of responsibility, as though you never have to pay it back. You apply for student loans, your requests are fulfilled without any immediate financial contribution from you, and your time and energy are focused on your studies, rather than on any future need to meet those loan obligations.

Even after you finish school, most student loans offer a grace period of several months beginning at graduation, during which you need not begin repayment. But then the day comes. Months after you obtain your degree, you find yourself opening a new piece of mail from a financial institution: your very first loan bill. You're uneasy, a little shocked perhaps, because you haven't yet built the monthly payment amount into your budget.

But you can, in fact must, deal with having a loan bill. You must make its payment a regularly scheduled part of your life in a very short period of time. Although you may feel an initial reluctance to part with what will probably be a sum of money you've been accustomed to using for living expenses, it is very much to your advantage to respond promptly every month when your loan bill arrives. Here is some practical advice to help you adjust to that new responsibility.

Know All The Terms of Every Loan You Incur

Before you ever sign your name on the dotted line of a loan application, whether federal, state, or private, make sure you know exactly what you're getting yourself into. There's nothing worse than borrowing money for school only to find out interest has been accruing over the entire span of your college career, or that the interest rate is not fixed, so if you miss one payment that inflates the amount of all your future payments.

It is entirely your responsibility to familiarize yourself with every detail of a loan contract prior to signing. Federal and state loans are relatively straightforward, because the purpose of those lenders is to facilitate your education. They make it easy to discover what will be expected of you during the loan's term. Even so, you should take care to understand what you will eventually need to do. Your best bet is to make at least one annual appointment with your school's financial aid counselor, who will be happy to guide you through the details of each loan.

Private lenders have no such beneficial motivation, because they are in business to make a profit from all their customers, including you. Often a private lender will force you to apply before disclosing all the terms of a loan, and bury most of the important verbiage in very fine print (which is not just a figure of speech, as you will learn). You must make your business to read and understand every single item, no matter how baffling the terminology may seem, because ignorance will in no way excuse you from adherence to all those contractual terms.

You are just beginning to establish your financial presence as a creditworthy entity, and it behooves you to seek help for the first few years when entering into adult financial contracts like loans. Ask, ask, ask: consult a parent or other trusted individual, see if that person will accompany you to finance offices, or seek out a local nonprofit credit counselor in your area. Many people do not ask such counselors for advice until they're experiencing negative consequences, but there is no need to wait. They can help you avoid getting trapped in a predatory loan situation.

Familiarize Yourself With the Borrowing Process

Again, before you agree to take on a loan, take some time to study the process of borrowing money. There are financial literacy classes available in many high schools, and you'll be able to find free financial counseling once you reach college. Understanding how to borrow means much more than simply knowing you'll have to repay it at some point. It means full comprehension of what the financial institution expects you to do, and what consequences will ensue if you fail to perform.

It's critical to remain in touch with a lender when you have trouble meeting a monthly payment. The lender wants you to be able to pay what you owe, and will usually work with you to lessen the payment amount for one or two months until you are once again on an even keel financially. Nothing makes a lender more edgy than not receiving your payment and not being able to contact you. If you're open and honest about any financial problems you're having, you stand a much better chance of staying out of default and preserving your good credit.

Know Your Repayment Options

You must make the time to research all possible repayment options when you decide on a loan. Many people think it suffices to know how many months will elapse until they'll have to pay a designated amount per month on their loan until it is paid off. However, that basic knowledge is the bare minimum of what you're required to grasp in coping with your new life as an independent wage-earner.

How you pay back each loan will depend on how much you can afford to pay each month while still supporting yourself. If you remain financially healthy, then the standard repayment schedule will probably work for you. If you expect to make more money in the future but currently can't afford a high bill, then a graduated repayment plan is perfect for you because it begins with lower payments, which slowly increase over time to adjust for your progression through a career.

Income contingent repayment plans, in which your payment is adjusted according to your income, family size and loan total, are perfect if you have a low-paying career, while the income sensitive plan lets you pay a percentage of your wages each month to retire your loan debt.

You see now why it's so important to be aware of your options? If you're not, you could very well go into default without even realizing you could have applied for a customized repayment plan, or even a forbearance or loan deferment, when the need arose. Don't wait to seek help until the worst has happened.

Have Your Own Repayment Plan

Besides knowing the various types of repayment plans available to you, you should take some time to come up with your own plan as well. This is your contribution to your future financial health, and you should devise it before you ever put your first loan payment in the mail.

Things to consider when coming up with this plan include how much you can afford to pay on your loan per month, how much money you expect to be making after graduation and how much you will need to spend each month on rent, utilities and other bills besides your loan or loans.

You should also consider loan consolidation and determine whether that is a viable option for you. If you took out more than one student loan, consolidation can help you manage your repayment schedule by rolling all your federal loans into one easily tracked obligation and monthly payment.

Another possibility to think about is saving. If you have a job while in college, why not set some money aside to cover your first few months of loan payments? That contingency plan will prevent anxiety in case your job hunting does not go as quickly as planned, because you will then have a few months' worth of cash dedicated to making your initial loan payments.

Most of the loan process is planning, and if you complete that planning carefully you can map out a simple and practical future course for managing all your finances, including loan repayments. This is simply a continuation of the expense planning you did in college to make sure you could meet your tuition bill.

But when you graduate, the focus of your immediate concern shifts to loan repayment, which of course begins with getting a job that allows you to cover all of your expenses while still repaying your loan and maintaining a bank account, however modest in size. With a solid financial plan for both college and repayment, and an in-depth knowledge of the loan repayment process, you'll begin your independent life with confidence in your own financial management skills.