In Part 1 of How to Do Student Loans Right, FJY Financial’s student loan expert answered the most frequently asked questions about choosing the loan that’s right for you. Part 2 covers FAQs about student loan repayment strategies.
Student loan debt is an economic reality for 44.2 million Americans. People under 40 carry the heaviest burden, at $844.8 billion. Unfortunately, debt can extend well past middle age, with seniors still paying on loans for their own or family members’ post-high school education. The Federal Bank of New York reports the following student loan debt for 2017 by age group (in billions of dollars):
Here’s some information to help ease the burden at any age:
How should I go about repaying my student loans?
Federal Loans: The U.S. Department of Education (DE) offers a variety of repayment options. If your circumstances change, you can apply to switch repayments plans for free at any time.
Standard – All borrowers are eligible for this plan, which is structured to pay off a loan in 10 years. A standard plan has the highest monthly payments compared with other repayment plans, but it is also the least expensive in the long run because interest accrues over a shorter time horizon.
Graduated – All borrowers are eligible for this plan, which is structured to pay off a loan in 10 years. Monthly payments start lower than under a standard loan but increase over time, usually every two years. A graduated plan is designed for borrowers with a relatively low income who expect future paychecks to cover rising payments.
Extended – Payments under this plan may be fixed or graduated and are structured to pay off a loan in 25 years. Borrowers with direct loans or Federal Family Education Loans (FFEL) must owe more than $30,000 to qualify. Monthly payments are lower than standard or graduated loans but interest accrual is much higher over time.
What if I can’t afford traditional repayment options?
You have the legal right to a “reasonable and affordable” payment plan for loans issued by DE. The department offers six plans based on how much you earn, plus a variety of other factors, including your spouse’s income and your family size. In most cases, any outstanding balance will be forgiven at the end of the loan period.
What about loan forgiveness programs?
You may be eligible for loan forgiveness under certain carefully-defined circumstances, including public service, disability, or the closing of the school you attended. Not all federal student loans have the same forgiveness, cancellation, or discharge options, and discharge provisions differ depending on whether you have a Direct Loan, a FFEL Program loan, or a Federal Perkins Loan. You can find complete information about these options at studentaid.ed.
Public Service Loan Forgiveness
What should I do if I get behind on my payments?
Contact your lender or loan servicer to work out a new payment plan as soon as you begin to struggle with on-time payments. If you haven’t defaulted on your student loan, there are two recommended options: apply for deferment or apply for forbearance. These options allow you to delay or reduce loan payments for a specified period of time.
With a deferment, you may not be responsible for the interest that accrues on your loan. During a forbearance period, however, you’re responsible for that interest. Be aware that you may have the right to forbearance even if you’ve defaulted on your loan.
If you do end up in default, contact your loan servicer as soon as possible for the best repayment terms.
What about Private Loans?
Private loan servicers may temporarily lower payments, adjust interest rates, offer deferment or forbearance, or—in rare cases—forgive the loan. Options are fewer, however, and terms less flexible than those for government-sponsored loans.
Should I Consolidate My Student Loans?
Consolidation allows for multiple loans to be packaged into one loan with one monthly principal and interest payment. For the most part, to even qualify for consolidation you must have either an FFEL or Direct Student Loan. Consolidation can allow you to have lower monthly payments, but with an extended time horizon interest will compound more and you’ll end up paying more in the long run. In some cases, consolidation can be a great option if you want to refinance your loans at a lower rate, but in most cases, if you’ve had older student loans with lower interest rates, your consolidated interest rate will probably increase. Also be mindful that consolidation can result in some lost benefits. There are certainly pros and cons to this strategy. Before acting to consolidate, evaluate alongside income-based repayment plans (if the loan qualifies), as well as deferment or forbearance options. For more information on whether consolidation is right for you click HERE.
Student loans can be very difficult to understand and plan for. Student loan repayment strategies should be grounded in understanding where your money is going. Start by tracking your monthly income and expenses, and see how much you can contribute to paying off your loan. Then you can effectively tell your money where to go, which is a great feeling. Getting into this habit will set you up for financial well-being and freedom. If you cannot generate the income necessary to pay off your loans, be sure to know what you are legally entitled to, and request a “reasonable and affordable” repayment plan. Making small dents in your student loan debt, compounded over time, can make a big difference. There is a light at the end of the tunnel!
Your loan amount and repayment plan can significantly impact your ability to reach your other financial goals. Reach out to FJY Financial for experienced guidance in choosing education financing that fits your unique life plan.