Lawrese Brown isn’t repaying her student loans right now.
Instead they’re in deferment as she earns a master’s degree in educational leadership, politics and advocacy at New York University.
While Brown didn’t graduate from college with much debt — about $16,000, she says — she’s considering putting her loans back into repayment. “It’s a snowball,” she says of deferring her loans. “The number you owe just gets bigger and bigger.”
As new graduate school students enroll, one of the decisions many will make is how to balance old undergraduate debt with fresh graduate school loans.
Ignore the debt, and it could swell into an eye-popping amount after graduation. Tackle it, and other bills and expenses might go unpaid.
“From a director of financial aid perspective, there’s a mindset of most individuals: ‘I’m going to get through this program, whatever it takes. I’m going to worry about student loans tomorrow,'” says Marty Somero, director of financial aid at the University of Northern Colorado. “Tomorrow is going to come.”
Fortunately for students, there are several options when it comes to managing college loans in graduate school.
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— In-school deferment or forbearance: Students enrolled at least half-time in graduate school can choose to enter in-school deferment.
One benefit is that borrowers in deferment don’t have to make regular payments while in school. And some loans — such as federal subsidized loans, which don’t accrue interest while the borrower is in school — also won’t earn interest during deferment.
On the flip side, other loans, including federal unsubsidized loans, which earn interest while the student is in school, continue to accrue interest in deferment. “The subsidized loan is the only free lunch you get,” says Fred Amrein, founder of College Affordability, a company developing college funding, financial aid and student loan repayment solutions.
The interest won’t come due on unsubsidized loans while they are in deferment. But when the deferment ends, interest will be added to the principal balance, known as capitalization. That means that, after graduation, students could pay interest on interest.
One way to tackle that interest-rate double whammy is to make interest-only payments, say experts. “Interest-only payments are a great thing to do,” says Somero. “At least you’re keeping your amount steady.”
Students who can’t secure a deferment can look into forbearance. Borrowers on forbearance earn a repayment reprieve, but interest will continue to accrue on all loans, including subsidized ones.
Those with private debt should check with their servicer to see whether deferment is available, says Amrein.
Follow these 10 resolutions to [keep college debt in check for 2015.]
— Lower monthly payments: Students who want to continue tackling debt in school but have limited income can switch to an alternative repayment plan.
Tying payment to income, enrolling in a graduated repayment plan or extending the repayment term can lower monthly payments, making the loan more manageable during graduate school.
And students can always throw some extra funds at their loans when they have wiggle room. “There’s no prepayment penalties, which makes the option beautiful,” says Cynde Quinn, senior director of college finance for Bright Horizons Family Solutions, whose programs advise employers and families on work, life and education issues.
Just make sure to specify how the extra funds should be applied, she says.
Learn to [prepay student loans the right way.]
Repayment plans that result in forgiveness, such as income-based repayment, Pay As You Earn or Public Service Loan Forgiveness, can be great options for graduate students. But don’t let eventual forgiveness be an excuse to let undergraduate loans fester during graduate school.
Students may think that, since the debt will be forgiven after 10, 20 or 25 years of repayment, they can let undergraduate student loans gain interest unfettered. After all, any debt accumulated in graduate school will be wiped clean eventually.
But students should approach that choice cautiously, say experts.
There are proposals to cap the amount of debt that can be forgiven under PSLF. Plus, some of those income-driven plans, such as Pay As You Earn, tax the forgiven amount, which can land borrowers with a sky-high bill from the IRS down the road.
— Continue repaying: For those who continue to work during graduate school or have the savings, salary or stipend to keep making payments on their loans, continuing repayment will pay off debt the fastest.
“If you can keep making regular payments, that’s great,” says Somero, of the University of Northern Colorado.
NYU student Brown’s modest undergraduate debt isn’t what has her concerned. Instead, she’s more focused on her graduate school debt.
“My honest concern is that my graduate school loans are going to kick me in the butt,” she says.
Trying to fund your education? Get tips and more in the U.S. News Paying for Graduate School center.
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Tackle Undergraduate Student Loans While in Graduate School originally appeared on usnews.com
