The Student Loan Bubble: Toil or Trouble?

As if our financial system hasn’t suffered enough - or caused enough suffering -economists worry that more difficulties lie ahead in the student lending sector.

Students, parents and lenders alike are stressed by rising tuition costs, mounting debt and a weak job market. Will the student loan bubble burst under the pressure?

For recent college graduates who borrowed heavily, these issues may hit very close to home. Federal loan repayment kicks in a mere six to nine months after graduation. Loan default, which can damage your credit report, makes it difficult to purchase a home, get a job or even find affordable insurance, is a very real possibility for many young people. If you’re a new college grad and facing your first loan repayment deadline -- or have a child in this situation -- here are some strategies that can help, even in tough times like these. 

Gather the facts

To meet your debt obligations, you need to know how much you owe and when it’s due. Open your mail and read your loan agreements. While the numbers may be intimidating, they can also inspire action. Armed with concrete information, you can determine how much income you need to meet your monthly bills and focus your energies on tackling the challenge. If you have questions or have missed a deadline, contact your lender immediately. 

Explore your repayment options

Before your grace period ends, familiarize yourself with the repayment plans offered on your federal student loans. With a standard repayment plan, you are expected to repay your loans with equal monthly payments over a 10-year period. Under special circumstances, you may qualify to extend the repayment period up to 25 years or make payments that increase over time as your income increases. Income-based repayment is a newer option that caps your payment based on your income and family size. Under this plan, you may pay less than 10 percent of your income, and if you still owe after making payments for 25 years, your balance may be wiped clean. 

Keep it simple

When you set up your repayment plan, opt for automated monthly loan payments. It’s a convenient service — you can be confident your payments will be made on time and avoid the temptation of spending the money elsewhere. Most importantly, you may be eligible for an interest rate reduction when you sign up for automatic debit. Ask your lender about automatic debit benefits. 

Get a job ASAP

Though it may be easier said than done in a struggling economy, be realistic about making income now that you’re a college graduate. Backpacking your way across Europe after may sound like fun, but think ahead to how it will affect your job prospects and your wallet as your loans come due. Polish both your resume and interviewing skills. If necessary, take a job outside of your field to generate income as you search for something better. Even part time work can help pay the bills. 

Delay repayment, if you must

If you simply cannot manage your student debt, talk to your lender immediately to determine if your case warrants special accommodation. You may also consider other ways to postpone repayment, as appropriate to your situation. For instance, if another degree or more course work will improve your job prospects and future income potential, you can defer student loan repayment by continuing your education. Take this course of action with care, as the last thing you want to do is incur more debt simply to delay repayment. Another way to postpone student loan repayment is to join a community service organization such as Americorps or Teach for America. These programs provide valuable work experience and a modest stipend in exchange for your talents and an automatic extension of your student loan grace period. 

Tap a financial expert

As any college student knows, information is power. Seek the expertise of a financial advisor who can help you sort out your financial goals and responsibilities and create a plan of action. If you’re considering a consolidation loan, an independent eye can help you evaluate lenders and weigh the feasibility of payments. 

Your hard work will pay off — eventually

It takes time and effort to eliminate debt. Fortunately, when you’re young, you have time on your side and energy to spare.  Take advantage of the resources offered by your alma mater, your lender and your community as you face your responsibilities. With hard work, discipline and a bit of luck, you can make good on your loans and capitalize on the education you received from your school — and from the valuable experience of overcoming a financial hurdle. 

                                                                 ### 

Robert G. Davis:  Licensed/registered to do business with U.S. residents only in the states of Washington and Idaho. 

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients. 

© 2011 Ameriprise Financial, Inc. All rights reserved.