College graduates, whether you’re a Millenial or Generation Y, face a financial burden from soaring college costs.
How to get smart about student loans so you can manage your college debt.
Managing crippling student loan debt
You graduated college, got your first job, and found a place to live. However, the bliss you expected to feel after college is overtaken by the mounting college bills. Sound familiar? It’s a reality faced by recent college graduates.
There’s over $1.3 trillion in student loan debt across the country, surpassing credit card debt.
The U.S. Department of Education has a student loan repayment calculator so you can estimate payments. You need to login to get a custom repayment estimation. By logging in, the tool pulls your loan amounts, types, and interest rates.
Repayment options
Once you know how much you’ll pay each month, figure out if that works for your budget. If the payments don’t work for your financial situation, it’s time to manage your student loan debt.
Unlike most loans, you have options with student loans.
First, consider how long you want to repay your loan. The Standard Repayment Plan is ten years, but you can change the timeframe. Of course, the longer you extend the repayment plan, the more interest you’ll pay.
Second, look at an income-driven repayment plan. With this plan, the lender bases your monthly payment on how much money you make and the size of your family. You need to fill out an application and choose one of four income-driven plans. Research each plan, as they all affect the cost of repayment differently.
Your loan servicer bases your payment amount on a percentage of your discretionary income. Each of the four income-driven plans uses a different percentage.
Third, change your payment due date. Sometimes budgeting for student loans just requires a date adjustment. Simply contact your loan servicer, and request a new payment due date.
How to consolidate student loans
Finally, consolidate your loans. While consolidation simplifies the payments, the U.S. Department of Education points out you may lose some benefits.
When you combine your loans into a Direct Consolidation Loan, you get one monthly payment instead of multiple. There’s no cost to do this, so be leery of third party companies who offer to do it for you. They’ll probably charge a fee.
Consolidation can dramatically lower your monthly payment by extending the terms of your loan to 30 years. However, you’ll pay more interest.
With consolidation, you may also lose benefits like interest rate discounts, principal rebates, and loan cancellation benefits. You can’t remove consolidated loans. The old loans are paid and no longer exist.
Finally, if you consolidate and you already put your loans in an income-driven repayment plan or the Public Service Loan Forgiveness program, you’ll lose credit for any payments you already made. Depending on where you are in the process of repaying your loans, this can be a significant loss.
Student loan forbearance and deferment
So what else can you do so you don’t feel the impact of consolidation? Look into a deferment or forbearance.
If you’re struggling to pay back your student loans, a forbearance or deferment is an option. They temporarily stop payments or lower the amount of your payments.
Again, call your loan servicer. They are your best friend rather than your enemy. Work with them, and they’ll work with you.
They don’t have a magic ball that tells them you’re struggling financially. Reach out to them and let them know, so student loans don’t affect your credit. There is help out there. You have to ask for it, though.
With a deferment, you stop making payments, but you typically don’t pay back the interest that adds up. This rule depends on your type of loan. The Department of Education has a chart to make it easy to distinguish if you’ll pay interest.
With a forbearance, you pay the interest that accrues on your federal student loans. You can pay it as it adds up, or add it to the principal balance. Perkins Loans are the exception to this rule. You can’t add interest to the principal of your loan with a Perkins loan.
Forbearance is allowed for financial difficulties, medical expenses, employment changes, or other reasons accepted by your loan servicer. Typically it lasts about 12 months.
If you request a forbearance or deferment, don’t stop making payments until you’re 100-percent sure your loan servicer agreed to the new terms. Otherwise, your loan will become delinquent and affect your credit.
Student loan forgiveness
If you’re struggling to manage your debt, you can consider changing jobs. Certain employers and volunteer opportunities offset the cost of your student loans.
The Public Service Loan Forgiveness Program forgives your loan balance after 120 qualifying monthly payments if you’re working for a qualifying employer. The keyword here is “qualifying.” Note, that it’s there twice.
You have to work for a qualifying employer. Typically these include government organizations, tax-exempt not-for-profit groups, and other types of nonprofits that provide qualifying public services. Full-time AmeriCorps and Peace Corps volunteers also qualify for the program.
Once you work for one of these employers, apply for PSLF immediately. That’s because you need your monthly payments to qualify for loan forgiveness.
Some employees wait years before they apply for the program, or until they’re struggling to manage student loan debt. While the chances of getting into the program don’t change, your previous payments won’t count toward the payments you need to qualify for forgiveness.
While changing jobs is a big life change, it may help you manage your student loan debt. After 120 payments, the lender forgives the remaining loan as long as you met the qualifying criteria.
This program isn’t for everyone. You need 120 qualifying months of payment. That’s ten years of payments, which is the standard repayment plan. So, it’s best to consider the PSLF program right after college when you first start making payments or if you have a large amount of debt and extend the repayment time beyond ten years.
Todd’s takeaway
The open road awaits you after college. It’s up to you which direction you choose. Consult experts along the way. Use them as your road map even if you don’t have a lot of money.
The advice of a certified financial advisor is priceless, especially when you’re first starting out and unsure of how to manage your money. They help manage your money and get you on a saving and investing plan.
Get smart with your student loans and get smart with financial planning early on in your life and career. It’ll put you on the path toward retirement quicker.
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