Student loans: How to get into and out of a mess

Student loans seem to have become synonymous with obtaining a higher education. Make sure you understand all the options available to you before you sign on the line.

By Maxine Giza

It's been said that an education is a great gift because it can never be taken away from you. Apparently, student loan debt can't be taken away either. Whether you are completing your undergraduate or graduate degree, the thought of paying for the education believed essential to "make it" can be hard to take.

According to finaid.org, "Two-thirds (65.7 percent) of 4-year undergraduate students graduate with some debt." More than half of those who graduate with a bachelor's degree end up owing just over $17,000 in loans.

College Years

Staring at a pile of college catalogues and acceptance letters, then 17-year old James McNulty had nothing but the future on his mind. McNulty had visions of meeting new people and preparing for a future in the communications industry. What wasn't on his mind was how he was going to pay for it.

"Loans were more of an afterthought," says McNulty. "The schools I got into were reasonably priced, so loans were the next step."

Fast forward four years and now McNulty is a Suffolk University senior just months away from graduation and finding out how much he owes for his education. "My parents handled my loans. And I never understood them, or gave it any thought really," recalls McNulty.

Jill D'Urso shares a similar experience.

After getting her undergrad degree from College of the Holy Cross in Worcester, MA, D'Urso spent two years working for an insurance company while living at home. While the pay was decent enough, D'Urso knew that she needed a change.

"It was by far the most miserable job I've ever had," recalls D'Urso. "I always wanted to work in publishing, but getting a job proved too difficult. I was interested in the Emerson program since college, and knew that it would be a good way of gaining contacts in the industry to help me get a job."

Like many students, D'Urso was focused more on where she wanted to go to school and not how she would be paying for it down the road. "At the time, you don't really consider what it will be like to pay back the loans. I really wanted to go to Holy Cross and I really wanted to go to Emerson, so I rationalized that I would do whatever I needed to do," says D'Urso. "I didn't really think about the amount of money I would be paying each month."

In fact, D'Urso isn't sure just how much she took out to pay for her education. "This is going to sound ridiculous, but I don't even know because it's too depressing to think about," she said. Ultimately, D'Urso believes she ended up taking out approximately $65,000 over four years for undergrad and $30,000 for grad school.

There are two types of federal student loans: subsidized and unsubsidized

Subsidized Stafford loans are the best deal a student can get. The government pays the interest on these loans while a student is enrolled in college full-time. What makes the loan even better is that it has a fixed interest rate of 6.0 percent for undergraduates and 6.8 percent for graduate students. Additionally, subsidized Stafford loans have a six month post-graduate grace period before repayment begins.

Unsubsidized loans are a bit different in that the borrower is responsible for paying the interest on the loan, which starts accruing as soon as the loan is disbursed. The interest rate on unsubsidized loans is 6.8 percent for both undergraduate and graduate students.

Federal aid is the best type of aid a student can receive. "Federal aid is need-based, it is determined based on the family's income and assets," said Michelle Smith, Director of Student Administrative Services at Emerson College. "There is not one thing you can do to change the formula, as you have to report the accurate information from your finances."

Students who are determined to have the most need may also be eligible for the Federal Perkins Loan Program. Perkins loans are available to both undergraduate and graduate students, have a fixed rate of 5 percent, and do not have to be repaid until nine months after graduation.

If federal aid and help from parents or scholarships isn't enough to cover college costs, students have another option-private loans. Private loans are obtained through private lenders and typically depend on your credit score. Unlike loans offered through the government, private loans have variable interest rates and typically do not have flexible repayment options. It is best to take out private loans only after exhausting all federal loan options.

None of the different loan options make a difference if you make some common mistakes. It's not unusual for students to miss deadlines and assume everything is "all set" instead of checking in with the financial aid office, says Smith.

How much will your monthly payments be?

Use the chart below to estimate what your monthly payments will be. The chart is based on Federal Stafford loans with a 6.8 percent fixed rate.

After college

Every month Jill D'Urso is reminded of the true cost of an education when she writes a check for about $1,000 towards her student loans. While graduate school helped D'Urso make some of her best friends and get her current publishing job, she isn't so sure it was worth the high price tag.

"Given the massively crushing debt I find myself in, as well as the fact that many of my peers in my company are two or more years younger than I am and don't have advanced degrees, I think I would need to really think more about my decision," said D'Urso. "Knowing what I know now, I don't think I would do it again. However, I wouldn't know what I know now without grad school, so it's a conundrum!"

Paying back loans

The high student-loan debt payments has made D'Urso come to terms with the unsettling fact that, she says, "I will never go on a vacation unless I win the lottery or marry rich."

While it may seem like a good idea to just ignore student loans, doing so can have serious repercussions. If you fail to pay your student loans not only will it ruin your credit score, but the government can garnish your wages and even take away a professional license. While paying back thousands of dollars can seem daunting, especially if you have never dealt with monthly payments before, there are several ways to pay back your loans.

Repayment Options

• Standard repayment is when you make payments of at least $50 per month and will have your loans paid off in 10 years. If for example you owe $60,000 in Stafford loans at 6.8 percent, with a standard repayment option you would be making payments of $690 a month for 10 years.

• Graduated repayment may make more sense if the amount you pay to your lender will increase over time and is a good option for someone who expects to earn more money over time.

• Similarly, income-sensitive repayment consists of changing payments. With this payment option, the amount you are required to pay to your lender adjusts every year and is dependent on what you anticipate your salary being. The real perk to this repayment option is that after 25 years the remaining balance on your loan will be discharged, however this option is available only for direct loan borrowers.

• The extended repayment plan is very similar to standard repayment, however with the extended repayment plan your payments are spread out over 12-30 years. With the extended repayment plan your month payments will be smaller; however you will end up paying more in interest.

D'Urso took advantage of the graduated repayment plan when the high monthly payments of nearly $1,000 became too burdensome. "I recently requested a graduated repayment plan that changed the duration of my repayment period from 10 years to 25 years, which helped lower the amount of my grad school loan payments," says D'Urso. "The payments are all starting to catch up with me and I don't know how I am going to make it all work."

Deferment Options

With the economy in a tailspin it is reasonable to be concerned that you will not find a job before it's time to begin repaying your student loans. In certain circumstances you can come to an agreement with your lender to stop making monthly payments on your student loans. Some typical circumstances include:

• Unemployment or working less than 30 hours a week (you must earn less than minimum wage or exceed a debt-to-income ratio as defined by the government)

• Enrollment in school at least part-time

• Serving or active duty in the U.S. Armed forces or National Guard

• In a rehabilitation program Similarly you may qualify for forbearance, which is also an agreement with your lender to stop making payments on your loans. Forbearance is different from a deferment in that under forbearance you will continue to accrue interest on your loans.

Future of Student Loans

The current administration is seeking to eliminate government subsidized third-party student loans. Under the proposed plan, money from the government would go directly to students, thus eliminating high interest rates and saving $94 billion currently used to subsidize third-party lender profits.

Less controversial actions proposed by the Obama Administration includes increasing the amount of aid offered through Pell Grants (money that goes to students determined to be most needy) and expanding the Perkins Loan Program.

Unfortunately for current students, even if student loan reform takes place, it will not take effect until July 2010.