You have probably been hiding under a rock if you haven’t heard a lot about the growing US student debt burden. These loans are a weight on those who carry these amounts early in their careers. For some, it may delay marriages, having kids and buying homes. This phenomenon may affect all of us in a reduced housing market and overall economy.
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College Is A Big Responsibility
Take control over your student debt and repayments. True, your parents may have helped you saving early through 529 tax-deferred savings plans. Now it is up to you to be responsible about your loans going forward. We provide some actions you can take to minimize your burden better and potentially faster.
Student Tuition and Loan Statistics:
- Average annual 4 year college tuition in 2018-2019 was $35,830 for private colleges; $10,230 for state residents at public colleges; and $26,290 for out-of-state public colleges. This is before room and board which could add $10,000 or more to annual costs.
- 70% of students borrow for college.
- Average debt is $37,172 with a monthly payment of $393
- A typical college grad may complete their degree with multiple loans
18 Tips On Handling Student Repayments Better:
1. Parents Should Save As Early As They Can
As soon as your newborn has a name and a social security number, parents should open up a tax-deferred plan to save money for college tuition. Look through the various investing options, including target-date funds. There are several plans to consider, notably your state’s 529 Savings Plan.
By saving early, you may be able to put a significant dent in your child’s borrowing needs later on with compounded benefits.
2. Don’t Borrow More Than You Need
When looking for colleges, consider affordability in your choices. Rather than borrow, think carefully about grants, scholarships, and work study. Working part-time may help to pay for some of your living expenses. For many students, attending community college is a right choice for many reasons, including affordability.
3. Organize and Keep of Track of Your Loans
You are responsible to know what your respective loans are. The National Student Loan Data System (NSLDS) will help you organize your loans. It is a database organized by the US Department of Education to keep track of all federal loans. The NSLDS will provide information on lenders, balance and repayment status for each of your student loans and options you may eligible for.
While you can go to your school’s Financial Aid Office, the NSLDS provides you with most of what you need, notably your loans, lender/loan servicer, balances, interest rates and monthly payments. Organize the information in your own spreadsheet to monitor progress and potential changes you need to make.
Compare what the NSLDS shows for your loans to what is reflected on your credit report. Make it a good habit to periodically review your credit report to make sure your loans appear correctly.
4. Pay On Time By Automating Your Loans With Auto-Debit
According to the Federal Reserve Bank of New York in the first quarter 2019, 9.54% of student loans were delinquent by 90 days or more. This rate is actually understated. Half of the loans are in deferment, in grace periods or in forbearance and temporarily not included in the calculation.
Delinquency or being in loan default can cause serious consequences. For example, late payments add damage to your credit score and ability to borrow in future. It can even result in wage garnishment.
Automatic payments are a great way to manage your finances, pay on time and avoid penalties. Signing up for auto-debit which is offered by most federal and private student loan lenders may even chip 0.25%-0.50% off the loan rate as an incentive.
5. Keep Lender(s) Up-To-Date On Your Contact Information
You may want to run from your lenders but you can’t hide from them. Whenever you move, let your lenders know by updating your address and any other contact information that has changed. You don’t want to miss any mail like late notices or updates from them.
6. Know The Grace Period of Your Loan(s)
Grace period refers to a period from the time you graduate, leave school or drop below half-time college status until the time that repayment begins. Not all loans have grace periods.
For most loans, interest still accrues during your grace period, which results in interest capitalization. (More on that later). Typically, available grace periods are 6 months. It is a longer time frame if you are in the Armed Forces.
Review your loans for the specific waiting period you have (or don’t have). Don’t extend the grace period as you will be adding interest costs to your balances. Use this period to be productive by signing up for automatic payments and understand your repayment requirements.
Super tip: While in school and working, consider paying $30-$50 per month if you are able to towards your loan.
7. Accelerate Your Loan If You Can Afford To
After you graduate, you may be fortunate to land a job with a generous salary and annual bonus. If you don’t get a bonus, you may find other ways to earn more– salary raises, second job, living at home–and reduce your loan bills.
Putting some of that extra money towards your required monthly bill is a good idea. This higher payment, especially if you can do it regularly, will ultimately lower the overall interest amount on your loan.
However, weigh the pros and cons carefully if you have important alternatives for that money. This could include other priorities like employer-sponsored retirement plan, setting up an emergency plan, or investing.
8. Pay Off The More Expensive Loan First
If you have more than one loan and are thinking about paying one off early, I recommend reducing the balance of your highest cost loan first (this is the avalanche method). This will lower your overall interest amount. Others may say eliminate the smaller debt amounts first (snowball method) because the psychological boost may matter to you.
That said, if you have the capability to make any payments that reduce your balance, you are a winner!
9. Avoid Certain Repayment Options
The standard federal student loan repayment period is 10 years while private loans may be 7-15 years according to Edvisors.com. Before reviewing the options, I prefer loans that are fixed and predictable with the shortest term possible. The longer you pay, the more interest you are paying on top of the loan.
You can consider changes later on. For example, refinancing to a lower rate is optimum if your credit score is high enough.
There are several options for federal loans, including fixed versus graduated monthly amounts. If you choose the graduated method, you may start at a lower amount with it rising slowly. This is intended to mirror your compensation progress.
High Debt: Income Ratio
There are ” Pay As You Earn” and income-driven repayment schedules if you have a high debt:income ratio. The federal government determines the monthly payment amount. It is based on a percentage of your discretionary income of 10% or 15%. The length of time for these loans are 20-25 years which adds more interest to your total cost of the loan.
Income-driven repayment plans may be a good option if you find yourself suddenly unemployed.
10. Do Not Extend Your Loan Beyond 10 Years
You may want to extend your loan from 10 years to 20 years or more. While it will lower your monthly payment it raises your total cost of the loan. This is not a good idea unless you absolutely cannot make the standard payment. The sooner you can get rid of this debt, the quicker you will have financial flexibility and the ability to plan for your future
11. Refinance Your Loan If You Can
Student loan refinancing is available for qualified borrowers to lower the interest rate and change repayment terms on their private and federal loans. To qualify for a new loan, you should have a good paying job, be financially responsible with a decent credit score (eg. 700 or above). If your credit score is too low, consider a co-signer to help you.
The College Investor, a top expert in student loans, recommends the best lenders for refinancing.
It doesn’t make sense to refinance the loan if you are considering one of the federal forgiveness programs, have poor credit, already have a low interest rate or a repayment plan that is income-based.
12. Consolidate Your Loans For Free
A consolidation loan allows you to combine several unsecured debts into a single new more favorable loan. You may benefit from a lower interest rate and/or a lower monthly payment. If you are consolidating all of your federal loans you can quickly complete a Direct Consolidation Loan form online through StudentLoans.gov for free.
13. Capitalized Interest May Be Costly
Capitalization of unpaid interest is additive to the principal loan amount. It can occur under several situations, such as after a period of forbearance or deferment or end of the grace period.
In certain situations, the federal government will pay the interest costs, specifically on needs-based subsidized loans, so you won’t incur capitalized interests. However, they do not pay accrued interest on unsubsidized loans during deferment or forbearance periods. This could lead to bigger loans or larger payoffs.
14. Use Tax Deductions
According to the IRS, your student loans from federal or private lenders may be deductible up to $2,500 of the interest paid in the previous year of a qualified loan. To qualify, the borrower must have earned less than $80,000 annually (or $165,000 if filing jointly).
15. Work For Companies That Repay Student Loans As A Benefit
Don’t expect billionaires en masse to offer you to pay off your student debt as Robert F. Smith committed to 2019 Morehouse graduates. That said, there is a growing list of companies that are stepping up to assist employees with their loans. It is a perk high on most college grad lists according to recent surveys.
When you get a job offer, examine company benefit plans for potential help with your loans. If it is not explicitly stated in their package, try to negotiate for some relief on your repayment plan.
16. Where Forgiveness May Be Available
For those employed in government, nonprofit and other public services jobs, relief may be possible after 10 years of employment. Additionally, there are pockets of the country, especially in rural markets, clamoring for certain majors, like nursing that will forgive part or all of your loans if you relocate there.
Outside of these special situations, the number of borrowers who were granted Public Service Loan Forgiveness (PSLF) is generally low. As of September 30, 2018, there were 423 student loan borrowers were granted forgiveness out of 49,669 applications filed. That is, the vast majority of students seeking forgiveness are rejected.
17. Students Loans Are Not Easily Discharged In Bankruptcy
Bankruptcy is a complex process in general. Federal student loans are particularly difficult to discharge if you declare Chapter 7 or Chapter 13 bankruptcy. You need to prove “undue hardship” for bankruptcy. The Federal Student Aid website provides guidance as to what undue hardship is.
A borrower seeking bankruptcy would need to prove:
- They cannot maintain a minimal standard of living.
- Show evidence that there would be hardship for a significant portion of the loan repayment period.
- A good faith repayment effort was made prior to the bankruptcy filing.
Even if you were able to discharge your student debt, the bankruptcy public record stays on your credit report for 7 or 10 years depending in the chapter you filed. Therefore, it is a lose/lose situation you do not want to consider unless you are in dire financial circumstances.
18. If You Are Unemployed
First thing you should do if you find yourself without a job is apply for unemployment benefits to mitigate your lost income. Then talk to your lender or loan servicer about potential relief. For federal loans, you can apply for deferment or forbearance for a temporary pause. Deferment can be as long as 3 years while forbearance is up to one year. Private lenders may also offer deferment and forbearance, but they vary so check their plans.
However, with deferment and forbearance, you may be still responsible for the interest that continues to accrue on your total balance.
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A college education is expensive but ultimately worth it. As a college professor, I am a bit biased. Most students take on student loans. Being responsible about your debt is a priority to ensure that you may have a bright financial future. Hopefully, some of these tips will help you better manage your debt burden successfully.
What experiences have you had with your student loans? What tips have you used to help you? We would like to hear from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.