I saw a meme the other day that read:
“Dear Sallie Mae, If it’s that serious, you can come get this degree. I’m not using it anyway…”
All kidding aside, even if that was possible, most of us wouldn’t dream of it – blood, sweat and tears go into earning a college degree! Unfortunately for many, however, the bleeding, sweating and crying doesn’t stop on graduation day.
It is estimated that two-thirds of American college graduates carry some level of student loan debt with an average load of $26k.
More often than not, folks are carrying this debt well beyond graduation. The current level of student loan debt in America now exceeds $1.2 trillion, the second largest form of consumer loan debt behind mortgages.
With those kinds of numbers, it’s no wonder there is a lot of information floating around out there on the subject.
The Problem with the Current Advice
Much of what is out there is broad and/or impractical. Move in with your parents? Get a second or third job? Ride a bike to work? These suggestions sound great on paper but are unrealistic for many of us with existing career and family commitments.
Are sacrifices needed? Yes! Your goal is to have your student debt paid down, off or forgiven. Here we’ll outline some solid, actionable advice.
First Things First: The Basics
Before we get into any heavy lifting there are a few tried-and-true initial steps to take:
- GET ORGANIZED. First, know the loan servicer and the amount owed for each of your loans. The loan servicer is not always the same institution that actually loaned you the money. They are the ones who collect, monitor and report payments on behalf of your lender, so theirs is the contact information you need to keep at hand. Make a list of your servicers and amount owed to each. For federal student loans, you can check who your servicer is at: https://nslds.ed.gov/nslds_SA/
- NEVER MISS A PAYMENT. Sounds simple, but we all know life can get in the way. Missing payments means incurring late fees and possibly increasing your rate…the goal is paying DOWN your loan, not owing more! Further, missing even one payment can mean a ding on your credit report. To make it easier on yourself, set up an automatic payment from your bank account; this also may qualify you for an interest rate reduction. If you absolutely cannot make a payment, be sure to call your servicer beforehand; there may be a possibility of extending your due date.
- BIWEEKLY REPAYMENT. Ask your lender about biweekly repayment plan options. This guarantees a faster loan repayment because paying every other week equals 26 total payments a year; therefore, you are essentially making an extra full month’s payment every year. Just be sure that in doing so, you don’t miss out on any interest rate discounts that come from monthly direct debit plans.
- PAY MORE THAN THE MINIMUM. Sounds obvious, but this is easier said than done. Being able to pay more than your budget currently allows means sacrifice…the money must come from earning more or spending less. Either one requires serious discipline.
- LOAN CONSOLIDATION. This option should be considered carefully. While it simplifies the loan repayment process for those with multiple student loans, it will not necessarily help you pay off your student debt faster. Often these consolidation loans offer 30 year repayment plans which, while allowing you a lower monthly payment, means more money paid in interest and a longer amount of time in debt.
Other Help You May Not Know About
Beyond the traditional tactics listed above, there are many government and private programs available to assist with student loan repayment or even elimination. It is important to note right off the bat that the IRS considers often considers loan forgiveness (including repayment assistance) as taxable income. Always be sure to consult with your tax professional to be sure.
Federal Government Loan Programs
- Graduated Repayment Plan – This is a way to give yourself an initial break on monthly payments while not extending your repayment period. You may pay as low as just your interest for up to four years, however, your payment will increase every two years. Your repayment period will remain at ten years so those later payments will be significantly higher. For consolidation loans, repayment can be extended up to 30 years depending on your total indebtedness.
- Income Based Repayment – Reduced monthly payment plan with forgiveness if loan is not paid at the end of the repayment period. Payment is determined as 15% (new borrower before 7/1/14) or 10% (new borrower after 7/1/14) of your discretionary income. Repayment period after which your remaining balance is forgiven is 25 years (new borrower before 7/1/14) or 20 years (new borrower after 7/1/14.) Remember to consider the tax consequences of forgiven balances!
- Pay As You Earn Repayment – Reduced monthly payment plan with forgiveness if loan is not paid at the end of the repayment period. Payment is determined as 10% of your discretionary income and the repayment period after which your remaining balance is forgiven is 20 years. If you work for a nonprofit or public entity serving the public good then your loan balance will be forgiven in 10 years. Remember to consider the tax consequences of forgiven balances!
- Income Contingent Repayment – Reduced monthly payment plan with forgiveness if loan is not paid at the end of the repayment period. Your monthly payment is the lesser of 20% of discretionary income or the amount you’d pay on a 12 year fixed payment plan (adjusted according to income). Repayment period after which your remaining balance is forgiven is 25 years. Did I mention to consider the tax consequences?
- Public Service Loan Forgiveness – After making 120 on-time, full and scheduled monthly payments while working full time in public service (federal, state or local government; or an IRS tax exempt non-profit), your remaining balance can be forgiven. Payments must be made as part of a qualified repayment plan. Utilizing an income driven plan (see three preceding bulletpoints)will maximize your forgiveness benefit as your 120 payments will be made at lower amounts.
Work in High Need Professions or Areas – The federal government provides full or partial student loan forgiveness in exchange for serving in high-need professions in high-need areas. Two examples are teaching and nursing. Teachers can receive incentives by serving in low-income communities, understaffed curricular areas like math and science, early childhood programs or special needs. Nurses also can receive incentives by serving in underserved communities.
Stay tuned for part 2 – State Government Loan Programs (goes live tomorrow) available to help you pay down and/or forgive your student loans.
Please share this article with your friends if you found it useful. So many are struggling with student loans and I know it’ll be really helpful to someone if they have a program that might help them out.