Keep a handle on student loans

NEW YORK (CNNMoney.com) -- Student-loan interest rates are expected to creep up July 1. It's not a huge jump - just 0.08 percent - but every penny counts. How do you keep your monthly payments low?

If you have Stafford loans and are still in school, or in the six-month grace period, interest rates will rise to 6.62 percent. If you've taken out a Stafford loan before July 1st of last year and you're in repayment, your rate will be 7.22 percent. Parents with PLUS loans will see their rate go to 8.02 percent.

Keep in mind, this is one of the smallest increases seen in the history of the program, according to Mark Kantrowitz of Finaid.org. In fact, for a student in repayment, the difference is less than a dollar a month on $10,000. And if you've taken out your first loan after July 1st, 2006, the change doesn't affect you at all.

But for those looking to ease their burden, Top Tips has some recommendations.

Consolidating your loans - or rolling them all into one and locking in an interest rate - makes the most sense for students who have graduated and are in the six-month grace period, since they can take advantage of lower interest rates. You'd lock up a rate of 6.62 percent by consolidating during the grace period, instead of 7.25 percent if you wait too long to consolidate.

Parents will also benefit by consolidating PLUS loans because the interest rate could potentially go up to 9 percent on future hikes. You can also take advantage of consolidation discounts that lenders offer. To find out what you can get, check out finaid.org.

Keep in mind though, when you consolidate, you stretch out the life of your loan - and you increase how much interest you'll pay over time. Increasing your loan payment from 10 years to 20 years will cut your monthly payments by 34 percent, but the interest you pay over the life of the loan will more than double.

If you are falling behind on payments, you want to get on the phone with your lender and explain your situation. If you are more than 270 days - nearly 9 months - late repaying a loan, you're technically in default.

That's when it will be recorded on your credit report. You could be sued, your wages and social security could be garnished and your information may be turned over to a collection agency where you could be charged 18 percent interest.

"It's very difficult to get your student loans discharged through bankruptcy," says Kantrowitz. "They're going to get their money."

As long as you don't go into default, you can take advantage of some repayment options. Some of these options include an economic hardship deferment. This lets you pay just the interest - not interest and principle - every month. You can do this for up to three years, but you must apply for it.

And of course, nothing is free - you will have to eventually pay back the principle. Medical students typically take advantage of this kind of program, according to Kantrowitz. There's also alternate payment plans that let you stretch out the life of the loan resulting in lower monthly payments, but higher interest over the life of the loan.

Plus lenders can also offer a payment plan pegged to your income. To figure out if you would qualify for some of these repayment options, go to finaid.org/calculators.

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