Students graduating from college head straight into all of the changes and challenges of adult life. For many, this includes the repayment of student loans, which is a huge financial responsibility – and one that many students don’t handle well.
The Education Data Initiative1 found that:
- One in 10 Americans has defaulted on a student loan
- 7.8% of all student loans are in default
- At any given time, 15% of student loans are in default
- One in ten new graduates defaults within the first year of repayment
- Two in five new graduates is delinquent within the first year of repayment
- Three out of four borrowers make at least one late payment in the first five years
Although there are many reasons for delinquency and defaulting on a loan, one of the biggest is that those with student loans do not understand their loans or do not remember what they learned about their loans when they first took them out.
That is where exit counseling comes in. The best way to help graduates avoid delinquencies and defaults that will ruin their credit, delay them from meeting life’s milestones, and even keep them from being hired for a better job is to help them understand their loans before they leave campus.
Rather than simply provide the minimal requirements for exit counseling, consider creating a game plan that will help your students stay on top of their student loans.
Tip #1: Explain When the Clock Starts Ticking
Many students do not know when they will need to start repayment on their loan. For example, almost 10% of graduates believe that repayment won’t start if they haven’t found a job yet2.
After students leave exit counseling, whether they drop out of school or graduate, they should understand the following:
- There is a six-month grace period from the time a student drops below half-time enrollment and repayment begins
- Some Stafford Loans may have a longer grace period – up to 12 months
- How to look at the promissory note to determine when payments start
- They have the option to shorten the grace period for unsubsidized loans that accrue interest from the date of disbursement to reduce the amount owed
Tip #2: Go Over Repayment
Students often do not understand how repayment works. The Student Loan Hero survey found that students don’t know if their interest is fixed or variable, and they believe that they can stop interest from accruing by putting a loan into forbearance or deferment and that their student loan payment is based on their income.
Students receiving exit counseling should understand:
- How to read the lender repayment disclosure statement that includes lender contact info, repayment schedule, interest rate, and balance owed when repayment begins
- Different repayment plans and what they mean to include standard, graduated, extended, and income-sensitive plans
- There are many different income-driven repayment plans including income-based, income-contingent, pay as you earn, and revised pay as you earn
- If they want to have anything other than a standard plan, they must apply for the plan
- Borrowers can change their repayment plan each year
- How different repayment plans affect the total interest paid over the life of the loan
- Private student loans often do not have as many repayment options and most do not have income-driven repayment options
- How refinancing student loans can reduce repayment options
Tip #3: Define Capitalization of Interest
Two-thirds of Americans do not understand the capitalization of interest3. They don’t understand how interest compounds as investments grow, nor do they understand how it works in reverse to increase their overall debt.
Exit counseling should help students understand what is happening to their balances when they are not making payments.
- Lenders add interest to loan principal
- This added amount also accrues interest
- The end result is an increased balance to be repaid
Tip #4: Discuss Budgeting
Although knowing how to budget isn’t specific to student loans, offering counseling on budgeting can be very beneficial for students going out on their own.
This budgeting discussion should go over the basics of budgeting, such as wants vs needs and fixed costs vs variable costs. Additionally, it should bring up issues relevant to newly graduated students, such as:
- Extra expenses: Deposits on apartments and utilities, furnishings, new clothes for a new job, better transportation, etc.
- Student loan payments
- Finding housing that fits within your budget
- Bills no longer paid by parents such as car insurance, medical insurance, or cell phone bill
- Take-home pay vs salary promised by employer
Tip #5: Discuss Deferments and Cancellations
Some students will have the option to defer or cancel student loan payments. However, Student Loan Hero found that 71% of students believe they will be eligible for cancellation when they are not.
During exit counseling, be sure that students understand:
- Educational deferments: At least half-time school, graduate fellowships, rehabilitation training, etc.
- Economic deferments: Unemployment, economic hardship, etc.
- Loan forgiveness for specific public service employees
- That bankruptcy rarely includes student loans
Tip #6: Explain Key Terms and Vocabulary
According to a Business Insider survey4, 27% of Millennials claim not to have understood the terms and policies of their loans when they took out their loans, even though they were given student loan counseling. That’s why it is essential to go over these terms again.
The goal is for students to leave campus understanding their loans and the obligations associated with these loans.
Consider offering definitions and explanations for such terms as:
- Annual percentage rate
- Promissory note
- Subsidized loan
- Non-subsidized loan
Tip #7: Warn Against Default
Finally, a strong exit counseling program will help students understand what can happen when a loan goes into default and provide them with ways to avoid defaulting on a loan.
Defaulting on a loan can ruin a student's credit rating, making it difficult to get a credit card, purchase a home, rent an apartment, turn on utilities, or find a job.
Things to do to keep from defaulting on a loan include:
- Keeping address up-to-date; if the loan has been sold, the new lender will not have a way to contact the borrower unless the address is accurate
- Reduce expenses to account for the loan amount
- Change the repayment option
- Consolidate loans
- Review deferment options
- Contact the lender and try to work out a plan
As your students enter the workforce, student loan exit counseling can provide them with tips for starting out on the right foot. As the student loan crisis continues to escalate these topics are more important than ever. To learn how switching to an interactive video-based student loan counseling program like iGrad can help.
1 - https://educationdata.org/student-loan-default-rate
2 - https://studentloanhero.com/featured/survey-majority-student-loan-borrowers-know-interest-forgiveness-works/
3 - https://www.fool.com/investing/general/2016/05/28/66-of-americans-dont-understand-this-crucial-finan.aspx
4 - https://www.businessinsider.com/millennials-dont-understand-student-loan-terms-interest-2020-1