Food for thought*:
- Nearly 20 million Americans attend college each year. (Source: Chronicle of Higher Education)
- Of that 20 million, close to 12 million – or 60% – borrow annually to help cover costs. (Source: Chronicle of Higher Education)
- There are approximately 37 million student loan borrowers with outstanding student loans today. (Source: Federal Reserve Board of New York)
- As of the first Quarter of 2012, the under 30 age group has the most borrowers at 14 million, followed by 10.6 million for the 30-39 group, 5.7 million in the 40-49 category, 4.6 million in the 50-59 age group and the over 60 category with the least number of borrowers at 2.2 million for an overall total of 37.1 million. (Source: FRBNY)
For many students, how to pay for a college education is one of the first major financial decisions they will make, but I think actually paying off these loans is even a bigger.
So you graduated (yeah!), but now you have to repay your student loans. Many of you have moved back home, reconsidered buying that new 2014 BMW, and many of you are working jobs you never thought you would be working with a college degree. But that is life. These loans providers do not pity your situation or the crushing of your dreams. They want their money and they want it now.
First and foremost, have you missed one or more payments on your student loans?
Missing payments on your federal or private student loans can hurt your credit rating and your financial future. Missing a single payment on a student loan can result in late fees, additional interest charges, and can increase the cost of repayment over the lifetime of your loan. Missing multiple payments can significantly increase the fees and charges and may cause you to default on your student loans.
Second, are you currently in default?
If you have missed any student loan payments, immediately contact your servicer and find out what steps you can take to avoid default. Your servicer is required to work with you to help you repay your student loan. Ask your servicer about alternative payment arrangements, including Income-Based Repayment (IBR) for federal loans (will be on the next blog, so be on the look out), which may lower your monthly payment substantially.
If you have gone more than 9 months (270 days) without making a payment on your federal student loans,you may be in default You may have received a notice or a phone call from the U.S. Department of Education, a guaranty agency or or a third-party debt collector, notifying you that you have defaulted on your federal student loan.
Unlike federal student loans, many private student loans go into default as soon as you are 120 days late. In some cases, a borrower may default by missing just one or two payments. You can also default on a private student loan if you declare bankruptcy or default on another loan. Review your private loan contracts carefully to better understand what rights you have if you are worried about going into default.
1. Know Your Loans: It is important to keep track of the lender, balance, and repayment status for each of your student loans. These details determine your options for loan repayment and forgiveness. If you are not sure, ask your lender or visit https://www.nslds.ed.gov/nslds/nslds_SA/. You can log in and see the loan amounts, lender(s), and repayment status for all of your federal loans. If some of your loans are not listed, do not get too excited, they are probably private (non-federal) loans. For those, try to find a recent billing statement and/or the original paperwork that you signed. Contact your school if you cannot locate any records.
2. Know Your Grace Period: Different loans have different grace periods. A grace period is how long you can wait after leaving school before you have to make your first payment. For example, it is six months for federal Stafford loans, but nine months for federal Perkins loans. The grace periods for private student loans vary, so consult your paperwork or contact your lender to find out. Do not miss your first payment!
3. Stay in Touch with Your Lender: Whenever you move or change your phone number or email address, tell your lender right away. If your lender needs to contact you and your information is not current, it can end up costing you a bundle. Open and read every piece of mail – paper or electronic – that you receive about your student loans. If you are getting unwanted calls from your lender or a collection agency, do not stick your head in the sand – talk to your lender! Lenders are supposed to work with borrowers to resolve problems, and collection agencies have to follow certain rules. Ignoring bills or serious problems can lead to default, which has severe, long-term consequences (see above).
4. Don’t Panic: If you are having trouble making payments because of unemployment, health problems, or other unexpected financial challenges, remember that you have options for managing your federal student loans. There are legitimate ways to temporarily postpone your federal loan payments, such as deferments and forbearance. For example, an unemployment deferment might be the right choice for you if you are having trouble finding work right now. But beware: interest accrues on all types of loans during forbearances, and on some types of loans during deferment, increasing your total debt, so ask your lender about making interest-only payments if you can afford it.
5. Stay out of Trouble! Ignoring your student loans has serious consequences that can last a lifetime. Not paying can lead to delinquency and default. For federal loans, default kicks in after nine months of non-payment. When you default, your total loan balance becomes due, your credit score is ruined, the total amount you owe increases dramatically, and the government can garnish your wages and seize your tax refunds if you default on a federal loan. For private loans, default can happen much more quickly and can put anyone who co-signed for your loan at risk as well. Talk to your lender right away if you’re in danger of default. You can also find helpful information at studentloanborrowerassistance.org.
6. Lower Your Principal If You Can: When you make a federal student loan payment it covers any late fees first, then interest, and finally the principal. If you can afford to pay more than your required monthly payment – every time or now and then – you can lower your principal, which reduces the amount of interest you have to pay over the life of the loan. Include a written request to your lender to make sure that the extra amount is applied to your principal! Otherwise it will automatically be applied to future payments instead. Keep copies for your records and check back to be sure the overpayment was applied correctly.
7. Pay Off the Most Expensive Loans First: If you are considering paying off one or more of your loans ahead of schedule, or trying to reduce the principal, start with the one that has the highest interest rate. If you have private loans in addition to federal loans, start with your private loans, since they almost always have higher interest rates and lack the flexible repayment options and other protections of federal loans.
To all of you out there paying your student loans, good luck. Paying these loans is manageable, just know HOW to manage your payments.
For all of you how CANNOT pay, not that you do not want to, please be on the look out for my next blog on loan repayment and forgiveness.
Happy paying off those relentless student loans,