Around 71% of Americans have student loan debt when they graduate from college–and paying it off isn’t easy. The standard repayment plan is set up so that students can pay off their loans around 10 years after graduation. Unfortunately, not every student is able to reach that goal. Some may take twenty years or longer to reach their student loan repayment goals–and that means a long time spent with debt hanging over their heads. Whether you’re thinking about taking out student loans in order to help pay for college or you’re looking for more information about paying your existing loans, these things you didn’t know about student loans ahead of time can help you more effectively manage your finances as you deal with student loan debt.
#1: You Can Get Loan Relief
Sometimes, your student loans stack up more than you intended when you were in school. Maybe you had to take out more loans than you thought you would cover the cost of your expenses through school, or perhaps you ended up taking an extra year or two to graduate, leaving you with higher student loan debt than if you had gone through school in the traditional four years. Suddenly, you’ve graduated, and you’re being crushed under the weight of student loan repayment. The good news is, there are relief options available.
If your student loan debt is federally driven, you can use a repayment program that will cap your loan repayments at a specific percentage of your monthly income–10%, 15%, or 25%, depending on your discretionary income and your financial needs. If you’re working with private lenders, you may still be able to contact them to experience relief in your repayment efforts. Note, however, that the longer you stretch out your payments, the more interest you’ll pay throughout the course of your loan–so do your best to make those payments as soon as possible.
#2: You Can Refinance Your Loans
Do you have great credit and excellent financial standing built up over the years since your graduation? Are you able to get a different loan at a much better rate than the one you initially received for your student loans? There’s the good news: you can refinance your student loans. In many cases, this can lead to lower interest over the lifetime of the loan and therefore faster repayment of your loans. Federal loans can also be refinanced into primary loans to make it easier to make payments. Note, however, that if you’re using an income-based repayment plan or you’ve temporarily deferred your loans, refinancing your student loans may not be a viable option for you.
#3: It’s Important to Understand Your Grace Period
Taking out a student loan is a great way to pay for college. After all, college is expensive, and most students aren’t able to generate enough income to pay for college while they’re studying. Unfortunately, student loans must eventually be repaid. Most student lenders understand that students aren’t simply going to dive immediately into a top-earning position in their field when they leave school. For this reason, they offer a grace period before students must begin repaying the loan. Grace periods will allow time for you to get that first job, earn a couple of paychecks, and be able to produce the money for loan repayment. For federal loans, this is usually a six-month period after graduation; private loans may have different terms. It’s critical to note when the grace period on your loan ends so that you don’t miss the initial payment. You should also note that during your grace period, you are permitted to make payments on your student loans–and doing so will significantly reduce the amount of interest that you’ll have to pay on your loans later.
#4: Forbearance Can Offer Financial Relief
You’ve been paying on your student loans successfully for years, reducing your debt one payment at a time. Unfortunately, financial hardship has struck. Perhaps medical bills have piled up unexpectedly or a job loss has made it impossible for you to continue making payments on your student loans. Contacting your loan company and opting for forbearance for a period of time will help ease the financial load on a short-term basis. It’s important to note, however, that this is only a short-term solution. Not only will interest continue to accrue during this period, most student loan companies will provide forbearance for only a short period of time. You may also be able to work with your lender to temporarily reduce your payments during a difficult financial period. Note that purchasing a car or taking out a mortgage are not considered adequate reasons for financial hardship in most instances.
#5: Debt Doesn’t Disappear
While there are instances in which you may be able to opt for student loan forgiveness, those circumstances are comparatively rare. When you take out student loans, they stay with you–and in fact, an increasing number of seniors are finding themselves still paying on student loan debt. Your student loan debt isn’t going to disappear! Even if you fail to graduate, you’ll still have to repay the loans that you took out: your student loans pay for the cost of tuition, books, and living expenses, not just the cost of the degree. For most students, the important takeaway is this: you should take out as few student loans as you can afford, rather than as many as you can. Finding scholarships–which don’t need to be repaid–and working throughout school to help offset some of the cost of college and living expenses can all reduce the burden of student loan debt after you graduate.
#6: There are Serious Consequences to Not Making Payments
It’s been a bad month, and when the payment for your student loan came due, you simply didn’t have the funds. Skipping one payment isn’t such a bad thing, right? Unfortunately, skipping your student loan payment can have serious consequences, including a negative mark on your credit report. Defaulting on your loans and continuing to not make payments can lead to wage garnishment, collections, losing your ability to receive future federal aid, and more.
#7: Student Loan Debt Impacts Your Financial Future
You’ve gotten used to the idea of carrying student loan debt. After all, most people have to go into debt in order to graduate, and you’ll pay it off eventually. It’s important, however, to consider how student loan debt has the potential to impact other financial transactions in your future. If you plan to buy a house or need to take out a loan for a car, for example, you may find that student loan debt raises your debt-to-income ratio to the point that you are unable to receive those loans. Repaying student loans as soon as possible can help free your finances and make it easier for you to make other financial decisions in the future.
#8: Interest Kicks in Early
There’s a misconception among many college students that student loan debt is different from regular debt–that is, that it doesn’t accumulate interest the same way other loans do. In reality, however, your interest starts accumulating as soon as you take out the loan. If you have a federally subsidized loan, the government will take care of those interest payments until you graduate. Private loans, however, start accumulating immediately. Make sure that you take your interest into consideration when you’re planning your future budget.
#9: The Person Who Takes Out the Loans is Responsible
In many cases, parents choose to help their students pay for college by taking out loans for them. There’s just one problem: the person who takes out the loan is the one responsible for repayment, and that can leave many parents struggling as they near retirement and their children are unable–or unwilling–to take over the payments on those loans. Parents who take out loans for their children should consider this money a gift, rather than assuming that their children will take over payments after graduation.
If you’re struggling to understand student loans and how they can impact you or your future student, contact us. We’ll work with you to learn more about the student loan process and how you can make it work for you.