Student loans have seen a massive spike in recent times, with each graduating student racking up thousands of dollars in debt. Even with the best student loans (federal or government-backed), students are increasingly struggling to pay them back.
Some argue that there is no student loan crisis and that the reason for the increase in the of people in debt, and the debt amount itself, is that more people are going to college than before. Compared to 15% in 1968, 39% of individuals (millennials) had a bachelor’s degree in 2018.
However, that doesn’t mean that high education costs are not a problem. In 2010, a total of $125.6 billion was borrowed for student loans. In 2017, that decreased to $106.5 billion. This decrease is attributed to fewer people enrolling in college each year since tuition fees continue to rise.
Compared to other loans, however, student loans can be repaid with greater ease.
Best Student Loans Solutions
Getting out of debt may be difficult if you have general loans, but there are lots of options to get rid of student loans. The following are some low-cost ideas on how to pay off student loans.
Deferment and Forbearance
Deferment and Forbearance are two ways through which you can avoid making payments, or lower the monthly payment amount on your federal student loans. During deferment, you don’t need to pay any interest. However, forbearance doesn’t stop interest from accruing.
Both of these options may be approved if you’re facing economic hardship, are unemployed, serving in the military, or recovering from medical treatment. If you get your payments reduced, you will only be paying the interest and not the principal, amount each month.
Keep in mind that going down this road will build up interest over time. This means that when you do payments, you’ll have to pay back a higher principal amount and more interest.
Income-Driven Repayment of Student Loans
An income-driven repayment plan is usually for students whose income is lower compared to what’s needed to effectively pay their student loan debt. If you’re repaying government student loans, your IDR can be as low as $0. There are currently four different IDR plans that are available to you, based on the federal student loan(s) you have.
Every year, your income and family size are assessed so that your monthly payments can be adjusted accordingly. However, lower payments do mean a longer loan period, with higher interest, eventually. In addition, you’ll be paying back your principal slower than usual. Some IDR plans have student loan forgiveness programs that forgive your remaining balance if you’ve been making payments for 20 to 25 years. However, you will still owe federal income tax on the said forgiven balance.
A lot of people can’t pay back their student loans even if they have an IDR plan. This is because IDR plans to take into account your gross income, which doesn’t consider various other taxes and expenses. Some students may be living check to check, and making payments may be impossible for them. Also, you can’t get into an IDR plan if you default, or apply for deferment and forbearance.
Overdue and Default Student Loans
If you stop or delay payments without notice, you may become delinquent. This can be a problem: if your payments are overdue for 3 consecutive months, your loan servicer will report you to 3 major credit bureaus. This will negatively affect your credit score and make it harder to get further loans (unsubsidized).
If you’re delinquent or overdue for a longer period, you may go into default. The time to go into default varies according to the type of loan you have. Although, generally, for federal loans, the time is usually around 9 months (270 days). Private loans, however, may put you in default the moment you miss a payment.
Depending on your loan agreement, going into default can have different repercussions, which can include your entire balance being due immediately, garnished wages, and your lender suing you.
Defaulting with Federal Student Loans
If you have a federal student loan and you’re defaulting, you have two options. You can either consolidate student loans, or you can enter the federal student loan rehabilitation program.
You can apply for a Federal Direct Consolidation Loan that helps you pay off your defaulted loan. In addition, you can set up an IDR plan along with it, to make it easier.
To consolidate your loan, you need to first make 3 consecutive monthly payments on your defaulted loan. The amount for these payments is based on your current financial readiness, so they may be lower than your typical payments.
Consolidation will get you out of the defaulter bubble a lot faster, but keep in mind that the default remains on your credit history, and it may come with additional accrued interest and possible collection fees.
The federal student loan rehabilitation program has a straightforward process. It requires you to make at least nine payments out of ten, in a span of ten months. The payment amount is determined by the lender and is based completely on your disposable income.
You will need to provide proof of your income and expenses. These payments may be as low as $5. Once you’ve gotten your loan rehabilitated, you can apply for an IDR plan, forbearance, or deferment. Your default won’t be shown in your credit history, but your late payments will. Your interest will accrue during this time and you will most likely have to pay collection fees. In addition, you can only rehabilitate your loan once.
Defaulting with Private Student Loans
If you default on a private student loan, your options are very limited. You can either refinance student loans or hire an attorney and negotiate with your lender. You may be able to reach a settlement that’s less than you owe.
If you can’t hire an attorney to build a full case for you, consult with one for an hour to get some advice on your options.
Student Loan Refinancing
Student loan refinancing is when you refinance your current loan with another, with a lower interest rate. This can be done with both, government student loans and private student loans. However, federal student loans cannot be refinanced into federal student loans. They will always be refinanced into private student loans.
You should only consider refinancing your federal student loan if there is a significant difference in the interest rates. It will reduce your monthly payments and the overall life of the loan. Keep in mind that if you refinance, you will lose all the federal student loan benefits such as IDR plans, loan rehabilitation, loan consolidation, loan forgiveness, forbearance, and deferment.
There is also an origination fee for starting a new loan altogether. If you refinance a private student loan, you can opt for either a variable or a fixed interest rate. A variable interest rate loan will have a lower rate overall. However, you will need to check how much it fluctuates, as well as, the highs and lows of the rate, before making a decision, so it doesn’t end up costing you more.
Finally, you need to show that you can make the refinance payments, which means that you should have a stable income and good credit history.
The Bottom Line for Student Loans
Student loans are not as bad as general loans, but they can still cause problems. It’s best to have a contingency plan in case of repayment issues. If you have a government student loan, you have a lot of options that can help you in various situations. With a private student loan though, your options are limited.
The best student loans are generally federal ones, so if you do want to take one out, go for a federal direct student loan. As for paying it back, there are several ways, but the best is to just try and make your payments on time. Make use of the different programs and avoid defaulting on your loans.