How to Tackle Student Loan Debt
March 19, 2019 | By Ana Elliot
So, we grow up being told we need to get an education, right? High school and college. It’s what you need for a solid financial future! You can’t not get an education: where would you be without one? This is the narrative we are sold from a young age. Everyone pushes us towards university, and we grow up excited for it and the future that follows. But what happens when we finally get to those gates of higher education? What awaits us along with all of the work, studying, and (hopefully) a degree?
Debt. Lots and lots of student loan debt.
Most people who go to college in the US can’t afford it without some help. This help can be scholarships, but rarely do they cover everything. More often than not, US college students find themselves taking out student loans to help cover tuition. A lot of students rack up thousands of thousands of dollars. The national average for the graduating classes of 2018 was about $30k! That is a lot of shekels 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’re here to help.
Tackling Your Student Loan Debt
So, first things first, let’s figure out what kind of student loans you have and what your grace period is. What is a grace period? Well, this is the period before you have to start paying back the loan after your graduation. That’s right! Most student loans don’t start knocking down your door for repayment the minute you get your diploma. This is great news, because this allows you to get a job so that… ya know… you can pay your loan.
Grace periods may vary depending on the types of loans you have. Most students end up with a collection of loans before they’re through. Make sure you look through all of your loans and figure out what 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:
Loan Types and Grace Periods
- Direct Subsidized/Unsubsidized Loans
- Subsidized/Unsubsidized Federal Stafford Loans
- Private Student Loans
- Federal Perkins Loans
The first two on that list allow for a six-month grace period. Most student loans from the government do. Federal Perkins loans are sometimes nine months but also depend on the school you got them from. Private loans are wild cards. Some of them have 6-month grace periods while others are quite short. Because of these different lengths, it is imperative that you figure out how many loans you have and what kind each one is. Contact your lenders and make sure you get your specific grace periods to avoid missing them.
Repayment plans are something you were probably told about when you applied for your loan. There are quite a few different repayment plans for student loans and most lenders will ask you to choose 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 too sucked in: 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 whenever you need too! Here are the basic repayment plans:
- Standard Repayment Plan: This plan comes locked and loaded with a standard monthly payment based on how much you borrowed and your 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 budget if you aren’t making enough money during certain periods. You don’t want your monthly payments to be over 10% of your 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. You aren’t making a lot now, but you plan to be making more in the future. These payments start out low and 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, you will be paying more 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 (We see you adjunct teachers). This plan sets your monthly payment based on how much you make a month. Your payments will rise or fall to match your salary. Paying this way can take a long time (max 25 years) and if you 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 your monthly payments around your income but also includes your family size. It also includes limits on what you have to pay annually. This repayment plan also has balance cancel if you reach the end of the loan term (again, max 25 years). If you work a “public service job,” you can also apply to have your loan forgiven.
Consolidating your Student Loan Debt
Once you’ve figured that out, you might be sitting here thinking, “Great! I have like… 8 different loans all on different repayment plans. Now what am I going to do?!” Well, it might be a good idea for you to look into consolidating your student loan debt into one loan. This is a great idea to take the complications out of paying back your loans once and for all. If you have multiple loans, it is easier to end up missing one of the payments or being late.
Even just one late or missed payment can seriously affect your credit score. To avoid this, consolodation is an option. You would 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.
Deferment and Forbearance
So, perhaps consolidation is not for you and you would rather tackle your loans as they come. What happens if you need help and get financially stuck? Here, I’m talking about what happens if you think you can’t make a payment for some reason. Well, you should 100% avoid not making a payment. Luckily, there are options in place for you. The first 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 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.
Student Loan Debt Final Costs
Make sure you’ve done your research. Know your loans, your repayment plans, your payment amounts, your due dates and all of that good stuff. You need to keep on top of your loans because a late or missed payment can hurt your credit score. These payments aren’t going away for at least ten years so you need to build good habits now. If you’d like read more about mistakes to avoid with repaying student loan debt, read this article from eadvisors.com!
However you decide to tackle your student loan debt, keep on top of it. Remember, if your financial situation changes, you can always change your repayment plans. If you are having an emergency, looking into forbearance or deferment could be the right call for you. Know your options, make your plans, and stick to it!