Many of us who take on student loan debt do so believing that we’re making a worthwhile investment in our futures. We assume that we’ll land well-paying jobs right after graduation and be able to pay off our loans in a timely manner. This is, of course, possible – but by no means guaranteed. Take a look these sobering facts:
- Wages have not been up with rising tuition costs. From 2007 to 2015, average student loan balances surged 60% while average pay for recent graduates rose 13%.
- Most of us think we will pay off student loans within ten years, but many Americans take up to 20 years to pay off their loans.
- About 8 million borrowers are currently in default on their student loans.
This is a big deal. Why? Because the implications defaulting on student loans can be pretty severe:
- It can damage your credit score, which sometimes scares off potential employers
- It can damage your ability to rent an apartment or take out a car loan; or set up accounts with utility and cellphone companies
- In some states, student loan borrowers in default can lose their driver’s license.
- You get deeper in debt as interest continues to accrue. Loans that go to collections will incur additional collection costs of up to 25% in some states.
- If your federal loans are in default, the government has the power to intercept your tax refund and garnish up to 15% of your wages.
- If private lenders sue for repayment, they may win the right to garnish your wages as well, and they can continue to seek payment indefinitely.
In short, if you have student loan debt, you want to manage it carefully. Ignoring it won’t make it go away – your best chance is to make a plan to deal with it head-on. Your plan may involve taking advantage of any available assistance in consolidating, lowering costs through refinancing, and pursuing loan forgiveness programs. The goal is to pay down your student loan debt while simultaneously saving and strengthening your overall financial picture.
Here are some specific tips for getting it done.
- Get a copy of your credit report. Not sure exactly what outstanding student loans you have? Your credit report details which loans are being reported by which lenders. There are many ways to get a free copy of your credit report online. (Credit Karma is simple to use.) You can also use the National Student Loan Database to track down your loans.
- Debt consolidation for for federal loans. You can consolidate multiple federal student loans into a single direct loan, held by the Education Department. This can simplify your payments and make you eligible for more repayment programs. Information is available at https://studentaid.ed.gov.
- Debt consolidation for private student loans. Consolidate your private student loans by taking out a new loan from a reputable bank. If you meet the criteria, this may or may not save money: it depends on whether the bank offers a lower interest rate on the new loan. Lengthening the repayment term will allow you to lower your monthly payments, but be aware that over the duration of the loan, because of interest paid, you may not save money overall.
- Student loan refinancing. If you have one loan, you may consider trying to refinance the loan. Student loan refinancing works the same as other refinancing, such as a mortgage: based on your credit situation a lender may agree to provide you a new loan with lower interest rates and a longer term to repay the debt. There are also other eligibility criteria that may affect your ability to refinance including the type of degree you have, where you went to school, being a US citizen and more. Whether or not you use their service, sofi.com, offers some good information and tools to help you assess whether refinancing is a good option for you.
- Income-Driven repayment plan (for federal loans only). If you have federal loans, you can bring payments more in line with your income by using one of 4-5 federal repayment plans that limit your payments to 10% of your discretionary income. The newest one is called REPAYE, in which you don’t need to have a certain debt-to-income ratio or to have borrowed at a particular time to qualify. All federal direct loan borrowers can enter REPAYE if they want to. With REPAYE, payments will still be capped at 10 percent of their discretionary income.
- Loan forgiveness for younger public servants and select volunteers (federal loans only). A number of volunteer or service-oriented professional jobs in lower income communities allow eligible borrowers to cancel a chunk of their federal student loans after just a couple of years of service. The programs are available to Peace Corps and AmeriCorps volunteers, to teachers, nurses, doctors, and other young professionals serving communities in need. Find information about programs available to recent grads and young professionals here.
- Loan forgiveness for those who don’t meet the criteria in #6 above. When you simply cannot afford your loan payments, especially in the case of private loans, which don’t offer the same flexible options as federal ones do, consider engaging an attorney who understands how to discharge certain private student loans in bankruptcy. It can be tough to qualify, but not impossible. If that’s not an option, you may be able to try to negotiate a settlement.