College graduation is approaching for many. It can be a very uncertain time financially so thinking of making loan payments when regular income is not established can be difficult. Unfortunately, many avoid doing anything.
Becoming delinquent or defaulting on student loans can have serious consequences at the very time graduates are starting to establish credit. Following are some steps those with student loans can take:
Make a list – if you haven’t already done so, make a list of what loans you have and who is servicing them. If you are not sure what you have check the National Student Loan Data System at www.nslds.ed.gov/nslds_SA. You can also contact your school’s financial aid office to see what they have on record. Your credit report may also list your student loans (www.annualcreditreport.com). Determine which loans are federally guaranteed and if any are private student loans. Private loans are usually a higher interest rate so any extra amount allocated to student loan payment should go to those first. But stay current on all loans.
Update contact information – Many students are behind on their first payment and often the excuse is they never received notice. When the grace period is up (usually 6 months), the payments are due. It is the borrower’s responsibility to keep the lender informed of address changes. Just because they can’t find you doesn’t mean you don’t need to start payments.
Consolidate? Consolidating may or may not be to your advantage but it is worth checking out to see if it makes sense for your situation. If you have several loans with different servicers one payment can be easier and there may be additional payment options available. For private loans, if you have good credit already established you may be able to remove a co-signer and also get a better interest rate. You cannot consolidate federal and private loans together. For more information on consolidating federal student loans go to www.loanconsolidation.ed.gov. For private loan consolidation information go to www.finaid.org/privateconsolidation.
Can’t afford the payment? Contact your loan servicer right away. With federal student loans, there are several payment options and they are very willing to work with you to find a payment arrangement that may work in your budget. You also may have available hardship deferments and forbearance options that allow you to stop or lower payments temporarily.
The main point is call and talk with your lender. Once behind on payments, it will affect your credit score. If you default on a loan (usually after 9-12 months of no payments), there are more serious consequences: 1) Further damage to credit. 2) Collection costs up to 25% will probably be added to the balance. 3) Wages and social security benefits can be garnished up to 15% (no judgment needs to be filed). 4) Tax refunds can be intercepted. 5) Ineligibility for additional federal student aid. 6) Loss of deferment or forbearance options.
When credit scores go down, your ability to get a job, obtain professional licenses and rent an apartment can be affected and insurance premiums can increase as well. A car loan or mortgage will be at much higher interest rates if you qualify at all. These factors affect your finances and in turn, your ability to address your student loans. Even though it may be tempting, don’t ignore the student loans. They do not go away. There is no statute of limitation for collection and they cannot be included in bankruptcy except in very rare situations. Work with your lender to keep your loans in good standing and let your positive student status build positive credit for you.