Let the Student Loan Games Begin
Student loan debt in the U.S. has reached nearly $874 billion according to the Student Loan Debt Clock at FinAid.org. That is almost $50 billion more than is owed on credit cards as of June according to the Federal Reserve. Those numbers are astounding when you consider credit cards are available to nearly all American adults while student loans are limited primarily to those who attend college.
Thousands of students will graduate this December and their student loan payments will begin immediately for some or within six months for others. Those who graduated last May have just begun feeling the effects of their repayment. With an average debt load of $24,000, according to a report from the Project on Student Debt, the average borrower can expect monthly payments of $276 for the next ten years. No wonders 85% of college graduates polled by the marketing firm Twentysomething Inc. indicated they would be moving back home.
Now the good news. Federal student loans are the most borrower-friendly loans on the market. There are programs to match nearly every borrower’s situation so there is no reason to be late or fall behind on payments. Whether the borrower cannot find a job, finds one with a low starting salary, or gets called to active military duty, there are federal student loan repayment options available. Failing to make payments or paying less than the minimum could mean serious consequences, such as wage garnishment and confiscation of any federal tax rebates. Credit scores will also be negatively affected. Plus, student loans cannot be dismissed through bankruptcy.
So how do borrowers eliminate their loans or find out their options? It is important they speak with their student loan servicer and their financial aid office. The first step is to understand how much is owed and to whom. The next step is to decide how to pay it off. For federal student loans there are many options. The borrower must be sure to choose the one that best fits his or her situation.
The Standard Repayment option is the best and least expensive option over the long run. The loans will be paid off in ten years and will result in the lowest amount of interest expense. Paying extra each month will eliminate the loans even quicker. If low salary is the issue there are several other options. The Graduated Repayment option results in smaller initial payments with increases every two years. The loans will still be paid off in ten years but with more interest and higher monthly payments towards the end of the loan. If there is no way to make those payments then the Extended Repayment option may work. If the borrower owes more than $30,000 the payments can be stretched out over 25 years. The payments are a bit smaller but result in a ton of extra interest expense. There are also payments based on income. Borrowers will have to check with their student loan servicer for details to see if they qualify.
Just plain broke? Then seek a Deferment. A Deferment means no payments are required for a period of time. To qualify the borrower must meet one of the following criteria: unemployment, economic hardship, military service, or reenrollment in college (at least half-time). If a Deferment is not an option then seek Forbearance. Forbearance is similar to Deferment but is up to the loan servicer to decide eligibility. These are both short-term solutions.
Regardless of the situation, if the borrower does not have enough money left over at the end of the month to make his or her student loan payments there are options available. It is the responsibility of the borrower to put forth the effort and contact the loan servicer. When all is said and done, keep in mind the money was borrowed with the promise to repay it. The borrower will be expected to do so.
Bill Pratt is an Assistant Professor at Piedmont Virginia Community College. He has also authored several personal finance books including The Graduate’s Guide to Life and Money and How to Keep Your Kid from Moving Back Home after College. For more information visit www.TheMoneyProfessors.com.