Student Loans 101

Graduating from college is an exhilarating time: You're on the threshold of many new adventures—like getting your first job. And if you (or your son or daughter) are like millions of other grads leaving college in debt, you will likely have some new obligations in terms of student loans. Here's a brief overview of student loans and how they can impact your financial future.

Your loan repayment schedules will depend on the type of loan(s) you have, which can include:

  • Federal student loans—the U.S. Department of Education offers three types of direct loans — subsidized (available to students who have demonstrated financial need), unsubsidized (available to any student), and PLUS loans (available to parents and graduate students). Federal student loans are available regardless of income, assets or credit history.
  • Private education loans—loans from banks, credit unions and private companies.

If you aren't sure what type of loans you have, visit the National Student Loan Database System and select "Financial Aid Review." Click each individual loan to find out the "servicer" for that loan (this is the company that will collect payments from you). Your servicer might be a different company from the original lender. Remember, this system shows only your federal student loans, not private education loans.

What's at Stake

Making your loan payments on time can help you build and maintain a good credit rating—and avoid the extra expense of late fees—while missing or late payments hurt your credit rating and can affect your financial future.

If your student loan goes into default, any or all of these could occur:

  • the national credit bureaus will be notified and the default will be noted on your credit report
  • you may become ineligible for any future federal aid
  • your wages could be garnished (i.e., loan payments could be withheld from your paychecks)
  • your state and federal income tax refunds could be applied toward the debt
  • a collection agency could come after you

Head of the Class

To stay on track, Nikki Lavoie, Corporate Communications Manager at private-loan provider Sallie Mae, advises setting a payment budget and then sticking to it—even paying extra if you can. "By paying more than the minimum, you can lower the total amount of interest you pay over the life of the loan," she advises.

Although more than 90% of Sallie Mae's customers make their payments on time, some customers will struggle with payments and need assistance.

If you are struggling, Lavoie advises you to contact your loan servicer. In some situations, your servicer can suspend or modify your loan terms to make the payments more affordable. You might also be advised to consolidate your debt (including your higher-interest credit card or other debt). And if you have several federal loans, they can be consolidated through the U.S. Department of Education.

Plan for Success

By establishing your payment budget and making payments on time, you'll avoid the negative consequences of a poor credit history and start building good credit, which will help you in the future when you're ready to buy a new car…or even your first house.

(Editor's Note: To request a free annual credit report, visit www.annualcreditreport.com. To find out your credit score, visit http://www.CreditSesame.com.)

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