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This article is by Rod Ebrahimi, CEO of ReadyForZero. an online site that helps people control and reduce debt. This is not an endorsement of his service, just good advice.
Do you have student loans? If so, your loans make up a tiny fraction of the whopping $1 trillion total student loan debt in America. Believe it or not, the average student loan holder has about $25,000 of loans. Whether you have more or less than average, you should know that there are programs and opportunities to help you manage your student loan debt and become debt free.
Here are solutions to the 4 most common student loan problems:
I don’t know what kind of student loans I have
The federal government – specifically the U.S. Department of Education – is the biggest student loan lender. However, it can be difficult to tell if your loans are federal loans or private loans. That’s because there are really two different types of “federal” loans: the ones that are owned by the government (direct) and the ones that are backed by the government but owned by a private lender.
The ones that are backed by the government are Federal Family Education Loans ( FFEL ). and despite being owned by private companies they are generally considered federal loans they have relatively low interest rates because the private lender does not have to worry about you defaulting on the loan (if you were to default, the government would reimburse the private lender for the outstanding balance).
So… in order to determine which kind of student loans you have, you need to do a little research. Use the National Student Loan Data System (click on “Financial Aid Review”) to look up your loans and find out exactly what type they are – and whether they are federal or private.
My monthly student loan payments are too high
It’s not a surprise that this is one of the most common problems faced by student loan borrowers. Since the global recession, it’s been difficult, especially for young people, to find good, high-paying jobs. Many graduates are finding it difficult to make their minimum monthly student loan payments. Well, what if I were to tell you that there’s a program most people don’t know about that can give you some breathing room while you work to achieve greater financial stability?
The program is called income-based repayment (IBR), and it works if you have federal student loans. The IBR plan adjusts your monthly payments so that you will pay no more than 15% of your current income toward your student loans. Yep, you read that right! This can be a blessing for people who desperately need a little more flexibility in their monthly budget. With IBR, you’ll also have a different timeline for repayment – 25 years instead of 10 years. Of course, that means you will pay more interest in the long-run, but it might be worth it if you absolutely can’t afford your student loan payments right now. And if you aren’t able to pay off the loans after 25 years of making payments under the IBR plan, the government will forgive any remaining debt.
But what if you have private student loans? Good question. It turns out there are some ways to adjust your repayment plan even when your loans are not backed by the government. What you need to do is call your lender and explain that you are having trouble making your minimum payments at the moment and that you would like to switch to an extended repayment plan. In many cases, your lender will work with you to adjust your monthly payments. But again, remember that you’ll pay more in interest over the long-run, so think it through carefully.
I’m confused by too many student loan bills
Do you feel like you get 25 different envelopes related to student loan bills every month? Does it seem overwhelming? if so, you should consider the Special Direct Consolidation Loan program, which allows you to group all your government-backed student loans (including the ones serviced by private lenders) together into one loan – which means you will only have one payment… and one bill!
This can be extremely helpful in cases where you are having a hard time making sense of all your debt and are unable
to formulate a consistent plan for paying it off. By streamlining your student loan bills down to just one, you will be able to focus on the amount you’re paying each month and determine the best way to manage your student loan and eventually get rid of it. Additionally, the Department of Education will take 0.25 percent off your interest rate for each loan you include in the consolidation.
However, the program is for government-backed loans only. If you have private loans, you can still consider whether you want to consolidate, but you’ll need to do some research to identify your best option. One way you might get a better interest rate is if your credit score has improved significantly since you originally got your student loans. In that case, you can use your good credit score to negotiate and save money in the long-run.
I don’t think I’ll ever pay off my student loans
With so many students taking on ever-greater amounts of debt (and then being confronted by this historically tough job market), many are wondering if they will ever pay off their student loans. If you are one of them, you should be aware of the options available to you.
For people with direct federal loans, there is a great program called Public Service Loan Forgiveness. which allows you to eliminate your entire remaining student loan debt after 10 years of working full-time in a qualifying public service job. The types of jobs that qualify include those with federal, state, and local government agencies, as well as with any tax-exempt non-profit organization. Even professionals who work in the health care, emergency services, or law enforcement fields may be eligible.
But if you don’t work in a public service job, what can you do? Well, to start with, you should take advantage of online tools that can help you make a plan for paying off your student loans.
And if you aren’t able to make payments on your loans right now, it’s important to know the difference between these stages of non-payment:
- Delinquency is when you have not paid your most recent bill(s). Some experts estimate that up to 25% of student loan borrowers are delinquent right now. Rather than simply remain in delinquency (and rack up interest charges) it’s better to contact your loan provider and research the options below.
- Deferment is an a temporary suspension of loan payments for a period of time agreed on by you and your lender, usually due to life events such as re-enrolling in school, unemployment, or economic hardship. In some cases, you won’t be charged interest on the loan during deferment, but this depends on your individual situation.
- Forbearance is also a temporary period of time when you stop paying, or make reduced payments, due to financial difficulties. However, you will be charged interest during this period.
- Default refers to the status of your loans when you have stopped paying entirely – usually after 9 months of not receiving a payment, a lender will place you in default. Once this happens, your loans may be turned over to a collections agency, and you will be held liable for the costs of collecting on the loan. You can also be sued for the entire remaining balance of the loan. And you will be at risk of having your wages garnished, up to 15% of your disposable income. Meanwhile, your default will also appear on your credit history for up to 7 years, making it difficult to obtain credit in the future.
By understanding the different risks and consequences involved in these four scenarios, you will be better prepared to make decisions regarding your student loan repayment. Whatever you do, remember it is always better to be proactive and contact your lender to try to work out an agreement rather than simply let your loans become delinquent – or worse, go into default.
Hopefully the information above has helped you find answers to some of the most common and frustrating questions regarding student loans. If you are struggling to pay your student loans, take some solace in the fact that millions of other borrowers are in the same position as you. And if you need more personal guidance, seek out a qualified student loan counselor or non-profit organization who may be able to offer you individual guidance.