Staying Afloat: How to Survive Student Debt

by Sarah Romero

While earning their undergraduate degrees at Utah State University (2005-2010), Nathan and Vicki Laursen borrowed $60,375 in loans to pay for tuition, a new car and an engagement ring. Within six months of graduating, they’d paid every penny back.

But this isn’t the case for some. Data from the Federal Reserve Bank of New York indicate two million Americans age 60 and older are still in debt from unpaid student loans. That’s not surprising when 71 percent of students in the U.S. graduate college with debt, according to the Institute for College Access and Success (TICAS).

Patti Kohler, director of USU’s Financial Aid Office, said USU students graduated with an average debt of $19,100 in the 2012-2013 school year. Compared to the national average of $30,000, this seems relatively low. However, a student with $19,100 of debt will pay $23,930 after interest, if paid off in the standard period of 10 years.  The amount of interest he/she will pay is equal to a full semester of school at USU.

Student debt can be an overwhelming reality, but it doesn’t have to be. Many repayment options and debt management tools are available to help with finances before and after graduation.

Before graduation

1. Pay attention to lifestyle choices

Kohler says it’s important to evaluate cost of living and distinguish wants from needs. “We talk a lot about living like a student and that’s not to say that you have to eat Ramen and peanut butter every night, but you should have a budget and stick to it,” she said.

Laursen said he and his wife had to make sacrifices to pay off their debt. “We tried to stay within our means. We didn’t eat out as much, or buy a nice TV or the gaming console we wanted. Our focus was always to take care of the debt before we buy other things.”

2. Look for additional sources of income

To limit borrowing, find extra sources of income such as scholarships. Kohler recommends students research within their college for available resources, as well as search online.

Kohler also suggests opening a savings account and working during the summer.  “Go out and get a job and save every penny,” she said. “Do what you have to. Students should be saving a big chunk of money over the summer to go toward their living expenses for the next school year.”

At one point, Laursen had four part-time jobs while attending school full-time. Kohler said students shouldn’t compromise schooling for work, but Laursen made time for both. “My wife and I also got a job managing apartments so we didn’t have to pay rent, which definitely helped save money.” Laursen opened high-yielding savings accounts and deposited money each month. “Pay yourself first,” he said. “Put money away and act like you don’t even have it.” By the time his grace period was up, Laursen had enough money to pay his debt in full.

3. Research loan options before applying

Students should know what types of loans are available and what each entails. The office of Federal Student Aid, which is part of the U.S. Department of Education, is a highly informational resource. (See sidebar for web address.) For example, its website explains the difference between subsidized and unsubsidized loans. Kohler advises only taking subsidized loans whenever possible because they don’t charge interest while students are in school and during the grace period (typically the first six months after graduation).
Students should also research federal versus private loans. Kohler recommends choosing federal before private. “If you go private, you may be able to get a slightly better interest rate than federal,” she said. “But almost all of them will require a co-signer, and they’re accruing interest from the time you receive the money.”

4. Be prepared for the payment amount

Kohler suggests students figure out how much they’ll owe each month with interestbefore they graduate. “There are a lot of student debt calculators out there that can help you figure out what your payment per month is going to look like,” she said. “It’ll give you a good idea so you’re not completely in shock when you get your first bill.”

After Graduation

5. Don’t forget about the loans

Kohler says the most important thing for students is to pay attention to their loans after graduation. “Don’t forget that you have them,” she said. “Be aware that

you have a responsibility to pay them back.” Financial advisers from TICAS also advise researching the grace period, because its length will vary depending on the loan.

6. Pick the right repayment plan

“A lot of students get scared about repayment, but there are so many options out there,” Kohler says. Federal loans are automatically based on a standard 10-year repayment plan. If this isn’t practical, students should consider applying for income-based repayment. This plan determines the monthly payment based on yearly income and forgives debt remaining after a certain period, usually 25 years.  “Financial aid advisers are really trying to push everyone into income-based repayment for a very valid reason,” Kohler said. “Every year they’ll evaluate your income and determine a regular payment that is reasonable for your family. That way you’re making strides to paying off your debt and you’re not going into default.”

7. If unable to make a payment, do something about it

Illness, returning to school, unemployment or military service may prevent graduates from making loan payments on time. In this case, borrowers may qualify for a deferment or forbearance. The office of Federal Student Aid defines deferment as a period in which the repayment of the principal and interest of the loan is temporarily delayed. Forbearance allows the debtor to stop making payments on

the principal for up to one year, but he/she is responsible for paying interest during that time.

In some cases, loans can be forgiven completely; teachers and public service workers are forgiven their debt after a certain number of years. Students can see if they qualify for a deferment, forbearance or loan forgiveness by visiting  studentaid.ed.gov.

9. Never default on loans

“Defaulting” means failing to make a payment on time, in which case the debtor has 90 days to pay the full amount. If he/she fails to do so, the three major credit bureaus will be notified and it will affect his/her credit rating. Kohler warns against defaulting because it can make it difficult to buy a home or car or even get a cell phone plan. “It can affect a lot of things long term,” she said.

Laursen could’ve joined the two million Americans celebrating their 60th birthday by sending a check to the federal government with “student debt” written as the memo.  However, he took control of his finances and paid off his student debt entirely before interest accrued. “You should treat compounding interest like it’s the plague,” he said. “If you know you have hundreds of thousands of dollars of student debt hanging over your head, that’s not going to be good for your stress level.”

Student loans should be taken seriously. If managed carefully, they can be the key to a successful future. As Kohler says, “Responsible borrowing is not necessarily a bad thing.”

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