With the strains of “Pomp and Circumstance” still fresh in their ears, many new graduates are hearing a loud “ka-ching.” It’s the sound of their student loan repayments about to kick in.
The average class of 2015 borrower will graduate college with just over $35,000 in debt, according to an analysis by Edvisors, a publisher of free websites about planning and paying for college. That makes the class of 2015 the most indebted class in history, graduating with a whopping $56 billion in student loan debt.
Equally significant: 71 percent of this year’s college graduates borrowed money to pay for their undergraduate education. Just 20 years ago, most students didn’t borrow at all.
“We now have a debt-based system of access to higher education,” said Heather Jarvis, a North Carolina attorney who provides educational resources and training for student loan borrowers. “And the system we have often allows people to borrow more than they can afford.”
These student loans can take decades to pay off. While the traditional repayment schedule is calculated over 10 years, options can stretch that debt over 30 years. That means some of this year’s graduates may still be making student loan payments when their own kids head for college.
If your indebtedness doesn’t exceed your first year’s salary, paying off your school loans will be far easier, said Mark Kantrowitz, senior vice president and publisher at Edvisors, who says budgeting, prioritizing, and belt-tightening are often enough to retire such loans in 10 years.
If your debt-to-salary ratio is out of whack, though, it may take significant lifestyle changes to get that loan repayment under control.
Whatever the amount owed, student-loan debt management requires planning, homework, calculations, and strategy. So here’s a brief primer about what new graduates should know about college debt.
Create an inventory. Most loans come with a grace period, but some do not. Moreover, each loan has its own interest rate and rules. So create an inventory of every loan, making sure you understand the interest rate, deadlines, repayment options, first payment date, and monthly payments for each.
It’s not uncommon for an undergraduate to have a mix of government and private loans issued for each year of study, Jarvis said. And each year’s borrowing will probably have a different interest rate. Remember, private loans do not have many of the protections and repayment options provided by federal loans, so make sure you understand the differences.
Consider consolidation. Consolidation was once an important strategy used to lock in lower rates. But these days, rates are fixed, so there is no longer any rate advantage. That means the primary benefits are reduced paperwork and a single monthly payment. Some decide against consolidation so they retain the ability to pay off the highest-interest rate loans first. The result: consolidation is far less popular than it used to be.
Review repayment plans. “Pick the plan that has the highest monthly payment that you can afford,” Kantrowitz said, noting that in many cases that will be the standard 10-year plan. “If you opt for any other repayment plan, you will be in debt for 20 or 30 years, and that will impact other life-cycle decisions like getting married or buying a house.”
Making 10-year repayments work, however, will probably require serious budgeting. When doing the calculations, Kantrowitz said it’s important to remember the difference between necessities and conveniences. “Cable TV is a luxury; a cellphone is a luxury,” he said. “A necessity is something without which you will die or go to jail.” Making extra payments against the loan principal will make the debt disappear faster.
Research all the options. The federal government has created increasingly flexible income-based repayment options that allow borrowers to stretch out repayment and get forgiveness for any debt not repaid after 20 or 25 years. Those who take public service jobs may be able to qualify for forgiveness after 10 years.
That’s particularly important to those graduating with high-priced advanced degrees. For example, median debt for a medical school graduate in 2014 was $180,000, according to the American Association of Medical Colleges, a nonprofit organization representing medical schools, teaching hospitals, and health systems. In some cases, newly minted doctors face debts of $250,000 or more.
These options mean doctors with big school loans can make minimal payments during their residencies, when median salaries start at $51,250, according to the association. The latest and most flexible income-based plan — Pay As You Earn — sets monthly payments at 10 percent of discretionary income. Any remaining debt is forgiven after 20 years.
Be aware of changes. Repayment options change, so keep abreast of new developments, says Megan McClean, managing director of policy and federal relations at the National Association of Student Financial Aid Administrators, a professional group in Washington. For example, the federal government is in the process of expanding the Pay-As-You-Earn option to borrowers who took loans before Oct. 1, 2007, with the change expected to take place before year’s end. Currently, it is only available to borrowers who had a federal loan disbursed on or after Oct. 1, 2011.
Go automatic. Lenders typically trim your interest rate by a quarter-point or more if you sign up for auto-pay with your bank. Setting up automatic loan payments is one way to make sure you’re never late.
Remember the deduction. Many student loan borrowers will be able to deduct up to $2,500 of interest at tax time. This tax break is available even if you don’t itemize. The deduction, however, disappears once modified adjusted gross income exceeds $80,000 for a single filer.
Lynn Asinof can be reached at email@example.com.