Over 44.2 million borrowers currently must repay 1.48 trillion dollars in educational debt. Students graduating in 2017, had an average student loan balance of $39,400, with former students under 30 experiencing an average monthly payment of $351. The payments can be equivalent to a car payment for the duration of a mortgage. The student loan debt crisis can delay important life events and place a burden on family budgets. With few options for loan forgiveness, students must learn to appropriately manage educational loans to prevent the long-term financial consequences of a default.
Whether you recently graduated or have spent years trying to pay down balances, you can implement the following strategies to manage your student loan debt better.
Review Your Loans
Over the course of earning a college degree, you typically receive two loan disbursements from the school each year. If it takes six years to complete an undergraduate program, you could have 12 or more loans with different rates and terms. Federal loans, which represent over 92% of student loan debt balances, provide important benefits during the repayment period. For example, federal loans offer generous forbearance and deferment options and allow students a six-month grace period before repayment begins. Understanding those benefits can help you better organize and manage your loan repayment options.
Financial aid gaps could lead to other debt, such as private student loans, PLUS loans, or other assistance you must repay.
The first step in managing your student loan debt is to understand the amount owed and terms of each loan. Make a list of the type of loan, balance, interest rate, grace periods and benefits of each loan. The National Student Loan Data System is a database of all federal student loans, which can simplify the process of gathering loan information. A review of your credit report can give you a list of non-federal loans in your name. You may need to contact the loan servicing company for the details and terms of your loans.
Choose the Right Repayment Plan
Federal loans now offer a variety of repayment options to accommodate the different financial circumstances students face after graduation. You can choose the standard 10-year plan, which will result in the lowest cost and fastest payoff.
Other options for full repayment include the extended term or graduated repayment. Both options will lower the initial monthly payment. The extended plan can lengthen repayment from 15 to 30 years, depending on the loan type. The graduated repayment plan starts off with a lower payment. Then every two years, the amount due increases, based on a 10-year repayment schedule. The graduated plan is the only option that could result in a payment higher than the 10-year standard plan, during the last few years of repayment.
You can also elect an income-based repayment plan, which could include loan forgiveness. Income-based plans promise a loan discharge at the end of the 20 or 25-year term, depending on the program. You could see loan forgiveness sooner if you qualify for another loan forgiveness program, such as the public service option, which forgives loans after ten years of qualified employment. In these plans, you must re-certify annually and the Department of Education bases payments on income and household size.
Before gravitating to the lowest possible payment, consider your long-term employment goals and prospects. If you expect to earn higher income over-time, extending payments could leave you with higher interest charges, and little in the way of loan forgiveness. On the other hand, working for a qualified employer could result in lower payments and large balances discharged.
Be Proactive When Circumstances Change
Employment often does not follow a linear track. If you find yourself out of a job, with high medical bills, or other circumstances, which create repayment difficulties, contact your loan servicing company immediately. There are generous forbearance and deferment programs, which can place a temporary hold on loan repayment, giving you time to get finances back on track. You can also switch repayment plans at any time.
Allowing loans to go into default can limit your options. A default can lead to wage garnishments, tax levies, and ruined credit, making it harder to rebound from a financial setback.
Make Repayment Easy
Setting up an automatic draft can prevent missed payments. It is easier to keep track of repayment progress when you automate the process. In some cases, lenders offer an interest rate discount for automatic or on-time payments in the first year of loan repayment.
Consider Consolidation Carefully
In repayment, you must decide whether to keep loans separate or consolidate the balances. When you have multiple loans with a single lender, even if you do not consolidate, you will only have one payment. Multiple lenders could lead to multiple monthly payments, adding more to your loan management. Consolidating federal loans with a private lender can eliminate the benefits offered to you through the government. Loan consolidation through an approved loan servicer, keeping the federal loan status, could limit or expand your repayment options. The decision could also impact the total interest paid if you want to accelerate the loan payoff.
Student loans are the second largest debt consumers face, behind mortgages. A college degree can provide higher lifetime incomes and more job opportunities, making educational debt a sound investment, in most cases. However, repayment can also be confusing because of the multiple loans, rates, and terms involved. As the price of college increased, you might have found it necessary to max out federal loans. In some cases, you must also find lending alternatives such as private or PLUS loans, further complicating repayment.
Following the above steps can help you manage your student loans effectively and implement strategies to pay them off faster.