According to recent U.S. Department of Education statistics for 2007, student loan defaults rose 35% over 2006 to 6.9% of federal college aid borrowers. While this number is still generally considered to be historically moderate, the rate of growth over the past few years is cause for concern. Factors that pushed this number higher included a poor job market for graduates, as well as students taking on higher debt loads to pay for ever increasing college costs.
The choice to take on debt to pay for a college education is one that many students face without fully knowing the potential consequences upon graduation. Most students look forward to having a higher paying job, and may take for granted that they will be in a better position to deal with their loans in the future.
But before getting off on the wrong foot in their finances, is there anything a recent graduate can do to lower their risk of defaulting on their debt?
Below are five tips for recent and soon-to-be graduates to help mitigate the risk of defaulting and anxiety that accompanies it:
Control your spending – for most recent graduates, the major purchase they dream about at graduation is a ‘real’ car to replace the clunker they’ve been getting around in. A new car is a worthy goal, however, if professionally and personally tolerable, try to get another year or two out of your current car before taking on any more debt at this point in your life.
Use this principal of ‘deferred consumption’ in other areas of spending. Instead of charging that next big purchase, save up and use cash. Build out a cash emergency reserve before allowing yourself to purchase any big ticket items. Don’t rush to make a purchase that you can shop around for a few months for a better deal.
Starting off your working life off with good consumption habits will reap rewards in the long haul over momentary feel-good benefits of undisciplined buying.
Don’t miss out on retirement saving incentives – if your first job includes a 401(k) with a company that matches contributions, don’t forgo saving enough in your plan to qualify for your maximum match. If at all possible, this should be a goal to shoot for ahead of paying extra on your loans. The tax savings, plus extra money your employer contributes, will accumulate at a far faster rate than you are paying on in your loans. And the fast growth of this savings can go a long way toward relieving the anxiety many have towards the level of their loans.
Also, as you start to earn more and consider the benefits of saving above the match versus paying off your loans, make sure to keep in mind that tax benefits for student loan interest phase out, but deductions for 401k contributions are generally available on every dollar saved. If you are able to ‘lock-in’ your student loans at today’s low rates then you should be ahead of the game over time by contributing more to your retirement plan versus paying down the loans.
Talk to your lender – if you can make your payments, but not the amount being billed, most lenders will work with you on payment plans. Interest only, graduated, and extended payment schedules might be appropriate for your career based on current and expected earnings. It may also be possible to consolidate your loans for a lower payment plan.
Postpone payments – if you absolutely can’t make payments, deferment and forbearance options can allow you to get up on your feet, and may even stop the growing interest if your loans are subsidized. The options vary by your circumstances, the type of loans, and the lender. If you can’t work out a payment plan that works for your current income, contact your lender and ask about the postpone options that are available.
Tax refunds and extra money – if you are eligible for the student loan interest deduction (most recent graduates will be), make a habit of using that money in your refund check to help pay down the principal of the loans. Along with your tax refund, use any other gift or inflows of cash such as job bonuses to pay down the principal of your loans.
Above all else, starting good spending and saving habits early can help create a financial life that is not burdened by the decision to finance college savings with student loans.