Take Steps Now to Be Sure You Can Repay Those Student Loans

Don’t Borrow More Than You Can Reasonably Expect to Repay

As May rolls around soon-to-be graduates start thinking about life after college. They look forward to moving, getting a job or traveling, and also start to think about repaying their student loans. Some have planned well for this and will be able to cover the monthly expense easily, while others will be shocked at the amount of debt they have. What lessons can next year’s crop of college freshmen learn from their experiences?

The good news is that it actually looks like graduates are getting a handle on their student loan repayments. In its Quarterly Student Aid Report, the Department of Education chronicles a continued increase in income-driven repayment enrollment, with an accompanying decrease in defaults and delinquencies as of the end of 2015. Graduates seem to be accepting more responsibility, studying their options and enrolling in such income-driven repayment options as the Income-Based Repayment (IBR), Pay as You Earn (PAYE), and Income-Contingent Repayment programs.

They are also beginning to see results from a new repayment plan called the Revised Pay as You Earn (REPAYE) program, which was first made available to borrowers in December 2015. This option enables Direct Loan borrowers to cap monthly student loan payment amounts at 10 percent of their monthly discretionary income. Members of the class of 2020 would do well to come away with these lessons when they think about accepting student loans to meet their own college expenses:

  • Think Before You Sign: Although it should not be the only factor, the amount of money you need to borrow should be considered when deciding which college to attend. Oftentimes, many academic factors are similar between colleges and it might make sense to attend the most cost-effective one. Spend time comparing financial aid offers to make sure you are making a dollar-wise decision, and not just an emotional one.
  • Don’t Over-borrow: Many students make the mistake of borrowing all the money that is available to them, even though they don’t necessarily need it. It somehow feels like “free money,” since they don’t have to worry about paying it back until after graduation. But borrowing more than what is really needed compounds repayment problems in the future. Estimate a budget for the first semester of your freshman year, and borrow accordingly. When the time comes to take out student loans for the next semester, you should have a better handle on how much you need and how much you really can spend.
  • Give Yourself a Reality Session: Don’t go about the borrowing process with your head stuck in the sand. Be fully aware of how much you are borrowing, and use the available student loan calculators to determine what your monthly payments might be in the future. Then take a good look at earnings statistics for graduates from your college, and make sure you have a reasonable chance of earning enough money to be able to make those monthly payments. If not, you’ve got some thinking to do as you try to figure out how to borrow less now or earn more later. It can result in some hard choices, but better to make them now than later when you are trying to get on with the rest of your life.
  • Learn Your Options: Many students graduate from college and then blithely waste their time until their student loan payments start coming due. Once the life plans are settled, these six months could be better spent researching payment options. In addition to the income-based repayment plans listed above there are also plans which can lengthen the term of repayment or consolidate federal student loans into one payment. But you cannot wait until the last minute to act.

As can be seen in the Department of Education’s report, it is highly possible to repay student loans. All it requires is a little foresight and planning to make smart decisions now that will make your future self very happy.