How to Take Care of Student Loan Debt: What to Know and What to Do
April 11, 2019 | By Ana Elliot
While there is a lot of different kinds of debt to be had in today’s society, none seems to be as fast growing as student loan debt. Most college students can’t afford all of their education without some help. Ideally, this help would be scholarships but there is only so much to go around and rarely do scholarships handle all the expenses.
Students who go away to school end up with even more expenses due to living on their own. In these times, students turn to student loans to cover their educational and living expenses. Americans now owe over 1.3 trillion dollars in student loan debt and the amount just keeps growing! A lot of students rack up thousands of thousands of dollars. Seven out of ten college grads have student loan debt. The national average for the graduating classes of 2018 was about $30k! An unlucky 19% owe $50k! That is a lot of money to owe when you walk into your post grad life! If you have student loan debt and you are worried about how to handle it, we are here to help.
Making a Plan for Your Student Loan Debt
The most important thing for student loan debt is to have a solid plan. Without a plan, you could end up defaulting or missing payments on your loans. Loan terms are often different and confusing so keeping track of everything. But, before you can get started making a plan, you need to make sure you know what kind of student loans you have and what your grace periods are.
So, what is a grace period? The grace period is an allotted time, after you graduate, where you don’t yet have to start paying back the loan. That is right! Most student loans don’t expect you to start paying the minute you graduate. This is pretty fantastic because most of us don’t finish school with a job set up to pay our loans with. Grace periods are the perfect time to start figuring out your loans and your plan.And if you are lucky and are in a good financial place, you can even start paying your loan back early (with no interest (depending on the loan!). Grace periods varying in length depending on the types of loans you have. You need to know the types of loans you have.
Most students end up with a collection of loans that they get throughout their entire college careers. One loan rarely will do for all the expenses! Make sure you look through all of your loans and figure out what kind of loans you have and your grace periods are. You don’t want to think everything is fine then get caught unawares! Here are the major types of student loans:
Student Loan Types and Corresponding Grace Periods
- Federal Loans: Federal loans are great options and generally come with lower, fixed interest rates, flexible payment plans, and, often, credit checks and cosigners are unnecessary. Federal loans do come in many shapes and sizes though so here is a list of the different types of federal loans. Most federal loans offer 6-month grace periods. Federal Perkins Loans (read more bellow) could be up to 9 months, depending on the school you got them from.
- Direct Subsidized Federal Loans: Also known as Stafford loans, these loans have accrued interest covered as long as the student (undergraduate, graduate, or professional student) is enrolled half time in courses. These loans are need based and the school will then let you know how much you can borrow. Loan terms are generally 10 to 25 years.
- Direct Unsubsidized Federal Loans: Like the subsidized federal loans, these loans are available to graduate and undergraduate students. These loans are not need based or merit based so pretty much anyone is eligible! The other difference here is with unsubsidized loans you are responsible for the accruing interest while you are enrolled and during your grace period. This accrued interest will then be added to the original loan which will make future interest even higher.
- Direct PLUS and Parent PLUS Loans: These two loans are similar in that they are some of the few that do require a credit check. The Direct PLUS loans are designed for graduate students or older students who have had time to build up their credit score. Students with bad credit can get an endorser with strong credit. Parent PLUS loans are taken out by the parent and they are required to pay while their student is in school.
- Direct Consolidation Loan: This loan is what you do when you have multiple federal loans. As I mentioned before, most loans won’t cover everything, so a lot of students accrue multiple loans. That is where a consolidation loan could be helpful. You can put all your loans into one and not have to worry about multiple monthly payments. You can also extend your repayment for 20 years which means lower monthly payments. That sounds good but that also means more interest in the long run.
- Federal Perkins Loans: So, the first thing to know about this loan is that it is no longer available! These loans were funded by the government and were specifically for students in dire financial need. They suffered from underfunding though so students didn’t always get what they needed.
- Private Student Loans: While Federal loans provide more protections through the government, private student loans will advertise being much more customizable. They come with different interest rates, fixed rates, and different repayment plans. Cosigners with strong credit are often a required. There are tons of different private loans to choose from, so you’ve got options. For graduates, they even offer refinancing loans that function similarly to the Federal consolidation loans. Private loans vary when it comes to grace periods. Some have them and some don’t. The lengths vary depending on lender.
Getting Information About Your Loans and Grace Periods
Do you not remember all your loans? Sadly, most of us as freshmen and sophomores were not great at taking notes or remembering things. A lot of students lose track of how many loans they have--never mind which kinds they have. If you are worried you don’t know all of the loans you owe, you can always request a free credit report which will list all your lenders. From there, contact the lenders and get the details. Contacting the lender is also a great idea for finding out how long your grace periods are. If you have any doubt, remember, just go to the source!
Repayment Plans for Student Loans
Now that we’ve gone over the different types of loans, the next thing to go over is the repayment plans. There are almost as many repayment options as loan options, so lets get talking! Repayment plans are something you were probably told about when you applied for your loan but you might not have paid a lot of attention to. There are quite a few different repayment plans for student loans and most lenders will ask you to chose the one you want when you apply. If you don’t pick a specific one, they often default you to the standard ten year repayment plan. Repayment plans vary in length and interest. While a lot of people chose longer repayment plans due to the smaller monthly payments, don’t get fooled: This means you’ll be paying way more over the life of the loan due to the interest. You need to pick the repayment plan that fits your financial needs. Also, if you just… picked random plans years ago when you got the loans, don’t worry. You can change your repayment plan at any time and you can do it multiple times! Here are the basic repayment plans:
- Standard Repayment Plan: This plan comes locked and loaded with a standard monthly payment based on how much was borrowed and the repayment length. The minimum starts at $50 but goes up from there. You have up to 10 years to pay it back, but this can be shortened. This is one of the quicker payment plans but, because the monthly payment is fixed, it could hurt your student’s monthly budget if they aren’t making enough money during certain periods. In general, it is not a good idea for the monthly payments to be over 10% of their monthly income. These plans do allow for prepayment, though!
- Graduated Payment Plan: This repayment plan is great for people getting out of college and making a starting salary in their field of study. Most post-grads aren’t making a lot now but plan to be making more in the future. These payments start out low then, over time (generally, every two years), get higher. These plans also have a maximum of a ten year period.
- Extended Repayment Plan: This bad boy is out there for people who have a lot of student loan debt and don’t mind paying for it for a long time. This plan is over 25 years with a lower monthly payment. As I mentioned before, the longer the payment plan, the more interest will be paid in the long run. Also, this plan is only for those who owe more than $30k in either private loans through the federally insured Federal Family Education Loan (FFEL) program or through the Direct Loan program. Also, different types of loans (either the private loans or the Direct Loan programs) cannot be combined to reach $30k.
- Income-contingent Repayment Plan: This plan can be applied to federal Direct Loans or Graduate or professional school borrowers. This plan is perfect for people who never have a solid cash flow. This plan sets a monthly payment based on how much your student is making a month. The payments will rise or fall to match their salary. Paying this way can take a long time (max 25 years) and if they still have unpaid debt, it can be discharged at the end of the loan term.
- Income-based Repayment Plan: So, this plan is similar to the above in that it sets the monthly payments around the student’s income but also includes family size (ie: if your student has their own family). It also includes limits on what they have to pay annually. This repayment plan also has balance cancel if they reach the end of the loan term (again, max 25 years). If your student is planning to work a “public service job,” they can also apply to have their loan forgiven.
How to Deal with Student Loan Debt in Tough Situations
With the strain of being a post grad and trying to make it in the job market or climb your way through your career, sometimes paying for student loans will be difficult. Student loan debts will be one more pain in the neck you’ll have to think about. There’ll be multiple payments with potentially varying amounts. If your financial situation goes downhill, you might fear missing a payment or being late but don’t let this happen! Even if you feel like you have no options, you definitely do. Here they are:
Deferment and Forbearance
So, what can you do if you can’t make a payment? Well, as I mentioned before, you absolutely do not want to miss one! Missing a payment or being late can have some pretty bad consequences on your credit score. So, how do we avoid that? Well, first things first, contact the lender. The lender also doesn’t want you to miss a payment so generally will work with you to make sure you don’t. There are a few options. The first we will talk about is deferment. This is when you experience an extenuating circumstance that makes you unable to pay your student loan. The lender will “defer” your payment for a period. For subsidized loans, accumulating interest can be waived or covered by the government. For unsubsidized student loans, you will accumulate that interest while not paying. Forbearance is the second option and it is for those who don’t have a valid reason to defer the loan. Instead you are granted a period of forbearance where the loan will accrue interest, regardless of the type of loan.
Consolidating your Student Loan Debt
If you are still struggling with having multiple loans and keeping track of them and all the payments, well, it might be a good idea for you to look into consolidating your student loan debt. Consolidating debt is something that happens often with credit card debt. It means you take all your different little debts and put it together under one big loan. This is a great idea to take the complications out of paying back your loans. If you have multiple loans, it is easier to end up missing one of the payments or being late. To avoid this, consolodation is an option. You end up with one loan (A Federal Direct Loan is a good option) and a fixed monthly payment. One issue with consolidating your student loan debt is that it will more than likely create a longer term period (30 years!) which means you will definitely be paying way more in the long run.
Keep On Top of Your Student Loan Debt
Ultimately, the biggest lesson to take away from this is: make sure you do your research. Know what kind of loans you have, what you owe in total, what your payments are and when they are. If you stay on top of your loans, you’ll avoid putting yourself in a financial situation you don’t want to be in. These debts are going to be with you for years so you might as well get friendly with them. However you decide to tackle your student loan debt, keep on top of it. Remember, if your financial situation changes, you can change your repayment plans. If you are having an emergency, looking into forbearance or deferment. Know your options, make your plans, and stick to it! If you’d like read more about mistakes to avoid with repaying student loan debt, read this article from eadvisors.com!