Dealing with debt

A student loan is often a smart investment. Borrow a little money now, and you’ll see a lifetime of returns with expanded career opportunities and higher-paying jobs. A decade’s worth of monthly payments is a small price to pay to live the good life, right?

But what about those of us who’ve used financial aid to “invest” in massive DVD collections, the latest and greatest electronics, and feasts at every upscale restaurant in Portland? Borrowing money with reckless abandon is tempting and easy. But when that six-month grace period is over, recent grads may find themselves buried under a suffocating monthly loan payment.

Suddenly, the good life seems hopelessly out of reach.

Portland State graduates carry an average debt load of $6,600 per year, or $26,400 over a four-year period. Assuming these are Stafford loans, which have a repayment period of 10 years at 6.8 percent interest, that’s a monthly payment of $303.81. According to Finaid.org, a website that offers a wealth of financial aid advice, you’d have to make around $36,000 per year to afford to make this payment.

These are scary figures for those of us graduating with degrees in psychology or liberal studies.

“We all get out thinking we’ll be making a million dollars per month,” said Phillip Rodgers, financial aid direction director at PSU. “But we don’t.”

But don’t go applying for a post-bac degree in investment banking just yet–student loans might be a big pain in the ass, but they’re all some of the most flexible loans available. You have options, grad. There’s still time to dig yourself out of the financial aid trap.

Assess your plight

Consolidation is often the most attractive option for students with considerable debt. When you consolidate, you combine all of your loans with one lender, who extends your payment period from the standard 10 years to 15, 25 or even 30 years, which lowers your monthly payments but skyrockets the amount of interest paid.

This option can be a godsend for those with a mountain of debt, but according to Rodgers, students should think carefully about whether or not to consolidate. If you have a debt of less than $20,000, he said, “You should really try to bite the bullet” and stick with the 10-year repayment plan.

Consolidation options

Standard

The standard repayment option is for a loan repayment period of 10 years. It won’t lower your monthly payment, but if you have loans from multiple lenders, this option will allow you to make one monthly payment to one lender.

Extended

The extended consolidation option doubles your repayment period to 20-30 years, depending on the company you choose to consolidate with. This can significantly lower your monthly payment, but you’ll pay quite a bit more in interest. According to loan calculators available through the U.S. Department of Education, your monthly payment on a 20-year loan of $26,400 would be around $200 per month, saving you $100 per month. But expect to pay over $22,000 in interest over 20 years, compared to interest payments of just over $10,000 if you’d paid it back in the standard 10 years.

Graduated

The graduated payment option allows you to pay less in the beginning and increases gradually over time. This is helpful to keep your payments low when you’re just starting your career. The monthly payments usually increase every two years. But again, you’ll end up paying quite a bit in interest. On a $26,400 loan, your beginning payments will be around $150 per month, but after 20 years, you will have paid nearly $27,000 in interest–more than your original loan.

Income sensitive

The income-sensitive payment option adjusts your monthly payment according to factors such as “Adjusted Gross Incomes (AGI), family sizes, and the total education indebtedness,” according to the Department of Education. The company looks at your income every year and adjusts your payments accordingly. The rules vary from company to company, but if you consolidate through the federal government’s Direct Consolidation Loan program, the loan repayment period is 25 years. You don’t have to pay what’s left after 25 years, but you do have to pay taxes on it. This repayment plan usually accrues the most interest.

Choosing the right consolidation company

Consolidation is big business. By taking on a student’s debt, loan companies have a very lucrative opportunity to collect thousands of dollars in interest over many years. As a result, there are hundreds of less-than-savory companies out there who’d love to get their paws on your debt.

The best way to make sure you’re consolidating with a reputable company: go with one you’ve heard of.

“When [students] do consolidation, it’s no longer a federally backed loan, so you need to make sure you pick the right company,” Rodgers said. “If you don’t know the name of the company, that’s not a good company to go with.”

Be sure to visit the financial aid office. The counselors, Rodgers said, are there to help students solve their debt problems. They can’t recommend companies, but they can help students find the best way to manage their debt, and fully lay out the options that are available.

Other options

“The key to loans is communication,” Rodgers said. “You have to communicate with your lenders.” Unlike your credit card company, which will gladly take your house away if you fail to make payments on time, the companies that handle your student loans usually don’t want you to go into default (meaning that you’ve stopped making payments and will have to be sent to collections). They want to happily collect your interest until your 75th birthday.

So talk to your lenders…they are willing to work with you.

Deferment

If you can’t find a full-time job, or experience financial hardship, you can apply for a deferment, which means you don’t have to make loan payments for up to three years after you graduate. Interest, however, continues to accrue.

Forbearance

Forbearance allows you to temporarily stop making payments on your loan, or only pay interest. If you’re going to be dirt poor for a couple of months, talk to your lenders. Many will allow a forbearance if deferment isn’t an option.

Default

With student loans, there are many options, but not paying isn’t one of them. Being in default means that you have not made any loan payments for 270 days. Don’t do this, ever. The consequences are massive. It’s much more practical to pay a billion dollars in interest over the course of your life. If you default on your loans, your credit rating will plummet, you can get sued, have your wages garnished, lose Social Security payments, and be ineligible for more loans.

Take it from our very own financial aid director:

“You have to pay your loans. They are backed by the government, and the government will find you.”