Many students worry about student loan payments once they graduate. To begin with, these bills will become priority because the government tends to be a less-than- forgiving creditor. When faced with a choice between paying the government and being a little late with another bill, keep in mind that defaulting Uncle Sam will damage a student’s credit much worse than a private loan.
“Don’t default on those government loans. Nothing will hurt your credit faster,” said Nathan Crozier, a senior student financial assistance counselor with GW Student Financial Aid.
“I just hope I get a job that’ll pay for (school) pretty quickly … I know I’ll be working my way through law school,” said junior Andrew Dubinsky. “Tuition’s part of (my financial problems). I mean, why am I paying more for GW than for Princeton or Harvard?”
There are two types of loans students will have to pay back. Subsidized loans never accumulate interest and unsubsidized loans do. A subsidy is basically a gift from the government.
Crozier recommended consolidating loans into a single payment so one check would cover all loans. Consolidating debts is like taking out a new loan at the current interest rate. Because prime interest rates are at a 40-year low of 1.25 percent, substantially below the rate of 5.5 percent at which most current seniors took out college loans their freshman year, students should consolidate now to get reduced rates. The prime interest rate is the lowest possible rate at which the government will allow money to be borrowed. When student loans are taken out, the borrower is charged prime interest plus a certain bank-determined percentage.
Crozier said students can only consolidate loans once, so they should take advantage of interest rates that, most likely, will not decrease any time soon. According to CNN, the prime rate has dropped steadily since March 2001. Loans taken out between then and now are being charged a higher interest rate than those taken out or consolidated today.
Non-subsidized loans accumulate interest while in school, so consolidating old loans in the near future would be beneficial, even if graduation is more than a year away.
Both Crozier and Karen Brooms, a Citibank Financial Advisor, said letting missed payments for student loans pile up unanswered is unwise. Instead, students should let the bank know ahead of time if they cannot make a payment and ask for a deferment.
All federal loans are automatically deferred for six months after graduation without the student asking, but many banks will provide a set number of additional deferments upon request over the life of the loan. Many non-federal loans carry deferment periods; however, details about the initial deferment and any subsequent deferments can vary widely from bank to bank.
Federal loans also go into deferment if students choose to continue their education after college, even if they’re only taking one class, Crozier said. Depending on your situation, registering part- time with a graduate program may buy you time if your monthly loan payments exceed what you would be paying in tuition. Subsidized federal loans do not gain interest while in deferment, so there is no penalty for putting them off – even more reason to go out and get that master’s degree.