Tackling Diploma Debt

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The typical college student graduates with eight to 12 student loans, says Kantrowitz, senior vice president and publisher of Edvisors, an education company focused on planning and paying for college, and founder of FinAid, a free source of financial aid information, advice and tools.

To stay on top of payments, he suggests borrowers set reminders in their personal digital assistants for two weeks before due dates. Signing up for automatic debit from a bank account can reduce late payments, and many lenders offer interest rate reductions of 0.25% on federal loans and 0.25% to 0.5% on private loans, he says.

He also suggests making extra payments, if possible. Neither federal nor private student loans carry prepayment penalties. Borrowers should specify that extra payments are to be applied to principal and which loan to apply it to, he says. “Otherwise, it can be completely arbitrary,” he says.

Loan deferment and forbearance are available to borrowers with hardships. Because interest continues to accrue, Kantrowitz says these options are best for shorter periods—for instance, if someone expects to land a new job within a few months, or is out on medical or maternity leave.

“Long-term deferment or forbearance not only delays the problem but makes it worse,” he says. Instead, he says, borrowers facing long-term payment difficulties can consider plans that offer extended, graduated or income-driven repayments. “Income-Based Repayment” plans cap repayments at 15% of a borrower’s discretionary monthly income, while “Pay-As-You-Earn” plans cap it at 10%.

In June, President Obama issued an executive order to expand the Pay-As-You-Earn repayment plan to more borrowers. “It’s not a done deal,” says Kantrowitz, “but it’s pretty likely there will be some expansion of Pay-As-You-Earn by the end of 2015.”

Income-Based Repayment and Pay-As-You-Earn plans offer debt forgiveness at the end of a loan period, but any remaining debt is taxable under current law.

Before students borrow funds for graduate school, they should explore research and teaching assistant opportunities that can defray costs, say Beloff and McCarthy. Beloff also suggests asking graduate school placement departments for employment statistics.

“Does the cost-benefit of an ancient history master’s and Ph.D. commensurate with the extra education?” he asks. “It’s a harsh reality.”