Student loan debt is often times the first credit your children will have. Many students receive and sign a loan agreement, without an understanding of what they have just signed – by the way, parents can be just as guilty. And, like a credit card, the loan amount can build very rapidly. So before it builds too high, here are a few steps that can help your student (and parent) in managing the debt they are taking on.
Start with WHO you owe and HOW MUCH
Most student loans are federal student loans, but occasionally students or families take out private loans. After four years of taking out loans, you may not remember who you owe and how much. Adding to this confusion, student loans are often sold or transferred to new servicers, making it even harder to track them down.
Internet to the rescue. There are two tools you can use to find out what loans you and/or your child has and the current balance on each:
- For federal loans you can visit the National Student Loan Data System (www.nslds.ed.gov). This is a database of loans and grants where you can see what debt you have and the status.
- For private loans, you can find the loan servicer and status of the loan by checking your credit report for free at www.annualcreditreport.com. The credit report will show all of your loans and lines of credit in your name – we recommend checking this, in any case.
Calculate the payments and budget
Once you have identified the student loan servicers, you can find out the minimum payment your child will owe each month.
If you can locate the loan promissory note, it will outline the loan terms, including the minimum loan payment and length of repayment. Even if you can't find the promissory note, the loan company will send your child a bill with the minimum amount.
For private loans, you can contact the lender directly via their customer service line to find out the account status and minimum payment.
You can also use the Federal Student Aid Repayment Estimator (https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action) to estimate how much of the payment will go towards interest versus principal. This is a function of the website studentloans.gov and you will need to sign up to use the functions. By running the numbers with your child, you can show them how applying extra payments to the loans can save them hundreds of dollars over the length of their loan.
Research repayment options
If your child's starting salary is too low to keep up with the payments, or if they are still job searching, look at possible repayment options.
If they have federal loans, an income-driven repayment (IDR) plan may be a smart idea. Rather than the standard 10-year plan, the government extends the repayment term to 20-25 years with an IDR option. Monthly payments are also capped at a percentage of your child's discretionary income, so they may significantly reduce the monthly bill. In fact, it's possible to end up with a monthly payment of $0. At the end of the repayment term, if any debt is left over, it will be discharged but taxed as income for that year.
Private student loans are not eligible for income-driven repayment, but some lenders offer interest-only payments. Just remember to tell your child that they still have the principal to pay for private loans! Under these plans, your child will pay a much smaller bill each month that only covers the interest. It will take much longer to repay the loan, but it can give a young graduate more breathing room until their career takes off.
Consider other repayment options / refinancing
If the interest rates on the loans are high, you might want to refinance. By refinancing the current loans, your child can get a lower interest rate and new repayment term. That approach can reduce the payments and help save money over time. It can be difficult for a new graduate to get approved for a loan, however, so you can help your child by co-signing the loan.
Keep in mind that co-signing means you're responsible for the loan if your kid misses a payment, so it's important to work out an agreement with your child ahead of time. Only take this step if you're confident in their ability to be responsible with their payments.
An important note, there is no federal refinancing. But, if you find a lower rate on a private loan, you may consider refinancing by paying off the federal loan. Beware, the many various loan types, rates and terms can give you a false sense that you are paying less. Be sure to review the loan details with us, prior to refinancing.
There you have it. Your child's first foray into the world of consumer credit. A true feeling of independence. But, with this independence comes a great deal of responsibility. Student loans are a great way for parents to help their children get off on the right foot (and not have them living in your basement again).
If you have questions regarding your child's student loan debt—or you own, please ask your advisor for advice. This is part of what you pay us for, and we are here to help.