The typical college graduate had $20,000 in student debt in 2007, but today’s graduates are leaving school with an average debt of $34,000. Americans together currently owe $1.5 trillion in student loans, while credit card and auto loan debt sit at $882 billion and $750 billion, respectively.
While it may seem like debt is spread evenly across all graduates, the fact is that millennials are saddled with far more debt than older generations. Of all American adults, approximately 16 percent have student debt, while 37 percent of individuals aged 18 to 29 will be paying down educational loans for years to come.
Student loan debt can feel crippling at times, but there are ways for students to take control of their finances and work with lenders to create a plan for success. The following guide takes a deep dive into both federal and private student lending, as well as repayment practices. Keep reading to learn about your options and get practical guidance from two student loan experts.
After signing a promissory note and ensuring their schools receive the necessary funds, most students largely forget about their educational loans – until the time for repayment comes. The good news is the government provides a grace period after a student graduates, leaves school or drops below part-time before they must start making payments.
All federal funds except PLUS loans offer a grace period of six months, although students should be aware that interest accrues during this period for most types of loans. Most federal loans offer an interest rate ranging between 4 and 7 percent, so students should take time to figure out how much debt the grace period adds, and whether they should simply begin payments as soon as possible rather than waiting six months.
While most information students find is for graduates, another population greatly in need of advice in this area are students who drop out of college. Approximately 44 percent of students haven’t completed their four-year degree after six years, and many of those students may never go back to school. But their student loan debt doesn’t disappear.
In fact, students who don’t finish college are far more likely to default on their loans and may also find it more difficult to get a job since they don’t have a degree. Even if you need to take time away from school for a season, most experts highly suggest getting some type of degree to be more competitive and make repayment less burdensome.
Despite best efforts, sometimes life gets in the way and borrowers struggle to afford their monthly loan payments. The U.S. Department of Education (DOE) offers several options for individuals who find themselves in this situation, including differentiated repayment plans, forbearance and deferment. Here are some steps to help you get back on track:
Some students may be allowed to have their monthly payment lowered if the standard decade-long repayment plan isn’t working for them. Alternate repayment plans are typically based on current income and include a pay-as-you-earn scheme, income-based payments (typically 10-15 percent of a borrower’s income) or income-contingent payments.
Individuals who are temporarily without income or can’t meet their payment requirements may be able to apply for deferment if they meet specific requirements. Students who are enrolled at least part-time, are experiencing economic hardship or are active members of the military are eligible. With deferment, borrowers aren’t responsible for paying accrued interest during the period of delay.
Forbearance is similar to deferment, except students are required to pay interest even when their repayment plan is temporarily suspended. This option is available for students facing financial hardship, employment changes or medical costs.
Private student loans don’t offer the same grace period as federal loans – and most require payments to begin as soon as the money is disbursed – meaning borrowers should consider their options immediately after applying for funding.
And because private loans typically have much higher interest rates than those offered by the government – and rates that are often variable – borrowers pay far more in interest in addition to principal. The average private loan has an interest rate between 9 and 12 percent, while some may go as high as 18 percent.
If possible, students should also consider whether they are able to work on a part-time basis while in school. Some semesters may be busier than others, but even earning a few hundred dollars per month can make the difference in whether learners are able to keep up with their payments.
Before committing to any type of loan, students should understand the rules and requirements of each. This is especially true of private loans, which don’t offer the same backing or transparency as federal options. Some of the most important differences to understand when it comes to federal versus private loans include:
The DOE only requires a credit check for PLUS loans and can help students develop a great credit score if they make payments on time. Private loans, conversely, often require an existing (and passing) credit score for individuals to receive money, which means students may have to rely on a cosigner.
While federal repayment plans don’t start until after a student is no longer in school (or is attending on a less than part-time basis), lots of private plans require payments while students are still enrolled.
Interest rates on federal loans are fixed for the lifetime of the loan, whereas private organizations may have variable – and higher – rates.
Unlike federal loans that offer options such as deferment or forbearance, private lenders are typically less flexible or willing to provide such options to students who are struggling with payments.
Facing a huge debt load can become a very stressful situation – especially when new grads are trying to find a job and start their careers. Mental health issues for recent college graduates have shot up significantly in recent years, with the most common manifestations including depression, anxiety, anger and extreme stress.
In addition to daily responsibilities, today’s borrowers now face serious questions of whether they’ll ever be able to purchase a car or home, and if they can really justify a vacation when so much money is still owed to lenders.
Reckoning with how to repay the money you’ve borrowed is enough to keep anyone up at night, but there are many ways for individuals with student loan debt to take control of their lives. It can feel harrowing at times, certainly, but it’s important to ensure you’re taking good care of your mental health at every turn.
One of the best ways of moving forward constructively is to research and fully understand the different options available to you. If your monthly payment is taking up too much of your income and creating stress in other areas of life, talk to a loan officer about a different payment plan. If unexpected life events mean you can’t make payment for a couple months, seek deferment or forbearance. Whatever your life situation, know that there’s a way to find relief and balance.
Rather than keeping up with multiple loans and different payment schedules each month, consider consolidating them. In addition to having only one payment, some students may also see a reduction in their monthly payment amount.
Reading the loan terms isn’t the most exciting way to spend your time, but knowing exactly what you promised the DOE and vice-versa can save tons of time and money in the long run.
Saving money when you first graduate may seem impossible, but having a little nest egg just in case you lose your job or have unexpected expenses can really reduce the stress of living paycheck-to-paycheck.
If one of your loans has a significantly higher interest rate, consider paying it off first so you aren’t losing so much money to interest each month.
When possible, think about paying more than your monthly requirement to get rid of loans more quickly.
If you’re a nurse, teacher, public servant or in a handful of other occupations, you may qualify for loan forgiveness after a certain time period.
Sometimes people are just too busy to remember to make a payment each month, and auto-pay settings can really help with that.
Rather than making multiple monthly payments that take time and energy, loans that have been consolidated exist within one simple payment to a single lender. Most federal loans can be treated in this way; however, private loans can’t. Students with these types of loans should instead talk to their lenders about the possibility of refinancing.
Consolidated loans allow borrowers to make one easy payment each month, rather than several.
The fixed interest rate is found by averaging the existing rates and rounding up by one-eighth of a percentage, meaning students may end up with a lower overall rate.
Like unconsolidated loans, borrowers still have access to multiple repayment options under this plan.
Students who are struggling to repay their loans in the given time frame can receive an extension so the monthly payment becomes lower.
Under consolidated loans, borrowers can set up a monthly automatic debit from their account, thereby saving time and improving their credit score from making on-time payments.
Loans can only be consolidated once, meaning that even if the interest rate went down in future, their rate would remain the same.
Because consolidated loans typically last longer than the standard 10-year loan, they’ll likely end up paying more in interest over the life of the loan.
Some loans, such as the Perkins, allow for certain individuals to receive loan forgiveness. Any types of benefits offered under the original loan terms go away once multiple loans are consolidated.
Consolidated loans don’t offer the standard six-month grace period for repayments after a student graduates, so if they consolidate immediately after leaving school, payments are immediately due.
Individuals who enjoyed any special repayment provisions under their old plan (e.g. reductions in principal or lower interest rates) will lose them once the loans are consolidated.
Although a less common option than forbearance, deferment or consolidation, some students elect to refinance their loans – depending on their unique circumstances. It’s important to remember that, while only federal loans can be consolidated, both private and federal loans qualify for refinancing.
Average federal loan interest rates hover between 4 and 7 percent, while federal loans are typically between 9 and 12 percent. By refinancing, however, students may be able to get a significantly lower interest rate.
Refinanced loans often offer a lower monthly payment than the original loan, thereby making it easier for borrowers to maintain their payments.
If you currently have a private loan that required a co-signer, refinancing often means you can release the co-signer from their responsibilities.
Longer repayment plans (say, moving from 10 to 20 years) often negate the benefits associated with lower interest rates, as students end up paying more in interest during the longer lifespan of the loan.
Refinanced loans don’t offer any type of forgiveness, regardless of the chosen career. In fact, refinanced loans are still due even if you die, meaning any remaining funds must come out of your estate.
Unlike standard federal loans that can enter deferment or forbearance, refinanced loans offer no time off from payments – regardless of circumstances.
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