The countdown has begun. Your graduating students are preparing for the transition from college life to the real world. Some are networking and applying for jobs. Others are making plans to attend graduate school. Some are spending time and making last minute memories with friends. And there are students who are processing and exploring what the next chapter of their life will be. It’s an exciting yet perplexing time for students on the verge of graduating. Many important decisions must be made. Of the nearly 70% of college students who graduate with loan debt, how many of them are thinking about repayment as they are making other life plans?
Shortly after the graduation cap is tossed in air, they should make a plan for repaying their loans. Unfortunately, far too many borrowers get accustom to a budget and lifestyle during the grace period that doesn’t include their loan payment—so when repayment begins, they struggle.
In the Best Practices for Financial Literacy and Education at Institutions of Higher Education, created by the Financial Literacy and Education Commission (FLEC), it states that the last semester before graduation and the grace period are a crucial time for students to begin to prepare to repay their loans, understand their options, and plan for their financial future.
The FLEC recommends that institutions help students:
- Understand loan repayment options and obligations
- Build a budget to set a repayment goal
- Identify and connect with their student loan servicer
- Assess the costs and benefits of graduate and professional studies
Federal student loans have more repayment options than any other type of consumer loan, however multiple options also create confusion among many borrowers. Although online exit counseling has made vast improvements over the years, it’s not the most effective method to educate all borrowers about their repayment obligations. Everyone learns differently. Using a single channel, one time, to communicate highly important loan repayment information may fall short.
Schools that provide loan repayment education to borrowers through their academic career and offer supplemental counseling when they leave, increase their chances for greater success in repayment. Consider utilizing multiple methods to share repayment information such as in-person presentations, social media blasts, flyers, and emails. Send congratulations cards after graduation with a few repayment tips and your business card so they have a person to contact if they have questions. All these educational touch points can make a difference, and can help a confused borrower become an informed one.
Here’s a checklist to help your students prepare for repayment.
Download this information, and more, in a PDF.
|Stay in touch with their servicer
One of the best ways to stay informed is to sign up for an online account with their servicer. They should also contact them whenever they have questions or difficulty repaying.
|Know your loans|
It’s important to know what type(s) of loans the borrower has. The loan type will determine their grace period, and repayment and loan forgiveness options. They can log into StudentLoans.gov to see the loan type, amount owed, and servicer information. If some of their loans aren’t listed, they probably have private loans. For additional information, they should contact the private loan lender, the school, or request a free copy of their credit report at annualcreditreport.com.
|Determine what's affordable|
Creating a budget will help the borrower know how much they can afford to pay each month. The budget doesn’t have to be complicated, however it should be realistic.
|Know your options|
Their subsidized and unsubsidized loans will automatically be placed in the standard 10-year repayment plan, unless they select a different one. If the standard payment amount is not affordable, there are other options. Borrowers should know they can always change their repayment plan if monthly payments become unaffordable. If they can’t make a payment, they can request a deferment or forbearance.
|Select the right repayment plan|
If they want to pay off their loans as quickly as possible, they should consider the Standard or Graduated repayment plans. With both plans, the repayment term is 10 years. If they want to pay the lowest amount each month, they should consider one of the Income Driven Repayment Plans such as: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAY), and Income-Contingent Repayment (ICR). After 20 or 25 years of repayment, the remaining balance is forgiven. If they want to combine all their payments, then a Direct Consolidation Loan may be better for them. For more information about repayment plans and consolidation, borrowers should visit studentaid.gov.
|Set a goal for repayment|
After they know how much they can afford, it’s a good idea to set a goal for repaying their debt. These questions will help them to select the best repayment plan—“Do I want to pay the loan off as quickly as possible?”, “Do I want to pay a lowest amount each month?” or “Do I want to combine all of my payments?”.
|Consider automatic payments
Having payments automatically deducted from a bank account assures the payment will be made on time. It can also save the borrower some money because they will receive a .25% interest rate reduction on Direct Loans. Every little bit helps.
|Look into loan forgiveness|
There are various programs that will forgive some or all the borrower’s federal student loans if they work in certain fields or for qualified employers. Public Service Loan Forgiveness (PSLF) will give remaining loan debt after 120 qualifying monthly payments. Teacher Loan Forgiveness Program will forgive $5,000 or up to $17,500 qualified teacher. There are also cancellation options for Federal Perkins Loan and employer-based student loan repayment programs.
|Take advantage of interest rate reduction|
Depending on their income, borrowers may be able to deduct the interest paid on their federal student loans, up to $2,500 or the amount they paid, whichever is less. Again, every little bit helps.
Join our upcoming SmartSessions webinar, Student Loan Repayment Checklist: Helping Borrowers Prepare for the Next Phase on Tuesday, April 28 at 2:00 p.m. CDT to learn more important tips and ways to capture your borrower’s attention.
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