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Personal Finance
Learning the loan lesson
February 1, 1999: 10:03 a.m. ET

Recent graduates forced to learn quickly how to deal with student loan debt
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NEW YORK (CNNfn) - Priscilla Richter, like many graduates, was faced with the daunting task of repaying thousands of dollars in student loans upon graduating.
     Also like many graduates, Richter found herself in a low-paying job after leaving school. The position, combined with her other job -- being a single parent -- left her little money with which to tackle her approximately $40,000 in student debt.
     "I was in quite a bind at this point," said Richter.
     Like all student loan holders, Richter had a six-month grace period after graduation to get things together, but low-paying work and what she admits was poor financial management made it a struggle. She approached her lender and was given an additional 18-month grace period.
     "I was relieved and signed the paperwork without reading the fine print," she said. "Interest accrues during this [18-month] period."
     The delay which Richter signed up for -- known as a "forbearance" -- is perhaps the last resort of the loan-weary graduate. However, many other ways exist to begin tackling student debt.
    
Financial aid

     Overall, more than 49 percent of undergraduates in the United States receive some form of financial aid, according to the U.S. Education Finance Statistics Center. Such aid averages out to about $4,926 per student annually.
     While lenders are eager to provide guidance for students signing up to receive financial aid and loans, graduates can find less help after they leave the hallowed halls of their schools.
     loan options
     Richter, for example, approached a consumer credit counseling service. However, the service typically works with people who have run up large credit card debt and they were reluctant to help her with her student loan debt.
     Typically, students have to begin repayment six months after they graduate or if they fall below half-time enrollment while attending school. After the grace period ends, the first payment will usually be due in 45 days.
     While you may feel hemmed in by having to pay off your loans right away, Sue Miller, vice president at Student Loan Finance Corp. said you have many alternatives.
     "Most lenders offer varying repayment schedules," said Miller, but most will steer you toward a fixed payment plan unless you request a different one.
     Under the fixed repayment plan, according to SLFC, your payment is a set amount for the entire course of the repayment, which is set at a maximum of 10 years. The minimum payment is set at $50 per month unless that won't pay off the entire loan over the 10-year period.
     Other options to the fixed plan exist, but they cost you more in the long run.
     The graduated repayment plan is one such option. It's geared toward those ever-so-common graduates who are grinding it out at entry-level wages.
     With this plan, you're betting your wages will be going up in the near future. Your minimum payments are lower in the beginning but then increase every two years when you would, presumably, be earning more.
     Since you're stretching out your payments, the term of the loan can increase anywhere from 12 to 30 years. Additionally, since you're chipping away at your principal more slowly at first, you will accrue more interest.
     Still, you're not completely stuck with a graduated plan. "You can prepay at any time," said Miller. "If you're making much better money in two years you can begin making triple payments if you like."
     The graduated plan comes with all kinds of variants and not all types of financial aid are eligible for these different repayment plans, so you'll need to check with your lender.
     When you're really in a bind, you may be able to get an income contingent repayment plan. Under this plan, the lender looks at your adjusted gross income and comes up with a payment contingent upon that.
    
Deferring the inevitable

     If none of these payment plans work for you, your next recourse might be getting a deferment. When you get a deferment, your lender agrees to temporarily suspend your loan payments.
     You can bet if your lender is giving you such a break, you'd better have a good reason.
     If you enroll in school again, you can usually get a deferment. In addition, entering a training program for the disabled, having some sort of major economic hardship and losing your job will also allow you to be granted one.
     In the case of unemployment, you'll usually need to apply for unemployment benefits and provide a list of places where you've applied for work.
     A spin-off of deferments is the aforementioned forbearance. You can get a forbearance when you don't quite qualify for a deferment. With a forbearance, your payments are suspended but you continue to accrue interest. So you're essentially doing nothing but running up unfettered debt at this time.
     Sometimes students accumulate loans from a variety of sources. Therefore, after graduation they may find themselves trying to work with two or more lenders about paying off loans.
     To ease the strain, if not the overall financial burden, of student loans, you can consider loan consolidation. Using this method, all your loans are consolidated into one combined loan.
     While this simplifies your loan payment process, it probably won't save you any money overall. In fact, you can sometimes end up paying a higher interest rate so it should be approached with caution.
     Graduates like Richter advise doing all you can to avoid defaulting on your loans. "You really can't mess around with student loans," she said. "They are never dischargeable under normal circumstances and follow you through life."
     Indeed, while Miller explained her firm will work diligently to make arrangements to help people who are having difficulty, she said they don't hesitate to notify credit authorities as soon as someone defaults.
     Defaulting on a student loan goes on your credit report and can seriously hinder your ability to get a loan later in life. Ironically, said Miller, you probably won't have difficulty obtaining another private student loan though.
     You can avoid many repayment problems, said Richter, by thinking ahead in the first place.
     She admitted she would have been better off if she had calculated what her debt load would have been in advance and matched that against what her average pay might be when she got out.
     Richter also urged other loan holders to take the repayment process one step at a time.
     "Chip away at the debt month by month and you will see results," she said. "Deal with them now and you won't have to pay later."Back to top
     -- by staff writer Randall J. Schultz

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.