Student Loans: When it's Pay Time

Congratulations to recent college grads...and their parents! So you've made it through four or five years of school. Now it's time to deal with the real world. This also means it will soon be time to start re-paying those student loans.

Over 65 percent of students use loans to help finance their college costs. The total student loan debt for an individual graduating college is about $24,000.

For most student loans, payments are not required while you are an actively enrolled student. But once you graduate, that all changes.

If you have a Stafford Loan, you'll be required to begin payments in 6 months. The grace period for Perkins loans is 9 months. Graduate students with PLUS loans will have to begin making payments six months after they are no longer enrolled at least half time.

Once you graduate, your lender will begin sending you repayment information in the mail, but here are two questions to begin thinking about now.

First, do you want to consolidate your student loans? Student Loan Consolidation allows you to combine most of your small student loans from various lenders into one, fixed-rate loan, with one monthly payment.

But you'll want to check if this will save on the interest rate. The Consolidation Loan interest rate is the weighted average of the variable rates on your existing loans, typically rounded up by the next eighth of a percentage point. Use the tools at the Federal Student Aid web site to compare the numbers for your loan situation.

Second, how quickly do you want to repay your student loans? You generally have four options, ranging from 10 to 30 years. Of course the quicker you pay off your debt, the less interest you'll pay. But it may be difficult to make large monthly payment on a low starting salary. And if tackling these debts keeps you from investing in your employer's 401(k), or paying off your credit cards, you should definitely consider an extended repayment period.

Here's something to think about: On a $24,000 loan with a typical 10-year repayment plan, the monthly payment would be $276 per month for 120 months. By the end of repayment, you would have paid back the $24,000 principal plus $9143 in interest, for a total of $33,143.

Finally, you can change your repayment plan at any time, and there's no penalty for paying your student loans off early.

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.

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