A short course on repaying student debt

In a few months, this year's college grads will face a new challenge: when and how to begin paying back their college loans. They're joining a ever-growing group of more than 44 million borrowers who owe over $1.4 trillion in student loan debt. About two-thirds of students borrow to pay for college, and 2016's grads on average owe about $37,172 in student debt.

The main reason students believe it makes sense to go into debt is that a college education can increase your lifetime earnings potential. The median income for 30- to 34-year-olds with a college degree is $40,944, but just $31,807 for those with only a high school diploma.

Still, the rising cost of college tuition has more folks debating the value of a college degree versus its cost. And many are finding ways to keep their costs under control.

Still, the College Board says it takes an average of 12 years to recover the cost of an undergraduate degree. And surveys of college graduates struggling to pay back their loans are troubling. The burden of loan payments is leading grads to say they've delayed buying a house, postponed having children and skipped medical or dental procedures. 

Many also report that their repayment obligations forced them to move back into their parent's home or live there longer than they expected.

Students graduating with loans are thrust into a world where they need to learn about budgeting and debt repayment -- something they probably didn't seriously study in school. But they can take steps that can make the process more manageable.

Students typically end up with five to seven different loans at graduation. Each one can be for a different amount and carry a different interest rate. You can track down all your federal student loans at the National Student Loan Data System, which is the central database for student aid and loans sponsored by the U.S. Department of Education. 

This site allows students to access all their federal student loans (Title IV loans and grants such as Stafford Loans, PLUS Loans, Pell Grants, etc.)  For private loans, you will need to contact each lender to get balance, interest rate and payment information.

It's important to take inventory of all your loans to know when you must begin repayment. Most loans (federal and private) will be in deferment for the first six months after graduation. You'll need to know when payments are due and how much the payment is for each loan. 

Also, you'll want to update your contact information with the lenders in case you've moved and get updated contact information for them because some of your loans may have been sold to another company that will now collect the payments. This is critical for ensuring you receive important notices and know where to send payments.

One way to make your student loan payments more manageable is to consider a "loan consolidation," in which you combine all your loans from various lenders into one. A primary benefit is a smaller monthly payment, the result of stretching out payments over a longer period and receiving discounts provided by lenders who are competing for your consolidated loan. 

Loan consolidation also provides simplicity -- you go from having to make multiple payments to multiple lenders to making a single payment to a single lender on a single loan. 

Finally, you can also gain some certainty. When you replace all your variable-rate student loans with a single fixed-rate loan, you'll have the certainty that your rate and payment won't change for the duration of your repayment period. 

Before you shop around for a consolidation loan, you'll want to make sure it'll have a lower rate than the weighted average rate for your existing loans. Check out loan options from banks such as Citizens or Citi, two of the largest student lenders. 

Also make sure you won't need the protections offered by your federal student loans, such as forgiveness for public service, deferment or forbearance. These protections are lost when your loans are refinanced or consolidated. 

Run the numbers for your situation and make sure to compare the interest rate discounts between the existing and consolidated loans.

One of the most important things is setting up a repayment plan on a schedule you can manage. Since you'll be living with these payments for 10 years or more, you need to make sure you can afford to make them consistently and on-time. 

While loan consolidation for many may seem like a no-brainer, the repayment plan requires a little more thought. Consider this advice: Commit to a repayment schedule that allows for the payments to be no more than 15 percent of your monthly gross income. 

For students with a high debt burden and low initial earnings -- such as lawyers or doctors -- this may be difficult at the start. But also consider that your income will also rise over time, so factor that into your repayment schedule.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.