Americans have a total of $1.2 trillion in student loan debt, and the average new 2015 graduate with loans will leave college with a tab of more than $35,000. Student loans are different from many other forms of debt, with special rules and programs having to do with repayment options, loan consolidation, and even how they’re treated in bankruptcy. If you’re among the millions of Americans with student loan debt, here are three things that our experts want you to know.
Dan Caplinger: One of the most confusing elements of having student loan debt is how the rules about consolidating different loans work. The benefit of consolidation is that it can simplify your life by giving you a single monthly payment to make, and it can offer lower monthly payments by allowing for longer-term loans than many federal programs provide. At the same time, though, extending the life of your student loans means that you’ll take longer repaying them, and you’ll often pay more in total interest than you would if you repaid your loans on a timelier basis.
Yet the biggest downside of consolidating a student loan is that you can lose any benefits that your original loan offered. For instance, some lenders offer rate discounts or principal rebates if you repay your loans on time, but your consolidated-loan lender won’t necessarily have the same provisions. Even worse, if you’re not careful, you can lose eligibility for loan cancellation or forgiveness provisions in your original loans if you consolidate. Because those earlier loans get paid off in the consolidation process, there’s no debt left to forgive in the eyes of the original lenders.
Consolidation can be smart, but you have to consider all the factors. Otherwise, you can end up making mistakes that you’ll regret for a long time.
Brian Stoffel: No one likes to consider the possibility of bankruptcy. It can be emotionally trying, while creating a lasting black eye on your credit report. But the flip side is that your debts are discharged and you have a chance to start anew.
But that’s not the case when it comes to student loans. Starting in 1976, loans offered by the federal government or non-profit colleges and universities had to be repaid, no matter the circumstances. This made sense, as these organizations were often loaning the money out at lower interest rates than one could find on the open market, backed by private companies.
Starting in 1984, private loans for student tuition were added to the list of non-dischargeable debts. This means that even if you file for bankruptcy, your student loan lender can have your wages garnished from your paycheck until the loan is paid off in full.
That’s important for students to remember before signing on the dotted line for tens of thousands of dollars in loans.
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Matt Frankel: Brian makes an excellent point that student loan debt cannot be discharged in bankruptcy, but bear in mind that it’s also one of the most flexible types of debt in terms of the repayment options available.
For example, you may be able to choose a payment plan that dramatically reduces your monthly payments. If you don’t earn a high income, the “Pay-As-You-Earn” plan limits your payments to just 10% of your discretionary income, and the extended and graduated repayment options could also keep your payments low.
Let’s say that you have $40,000 in student loan debt at 6.8% interest. Under a standard (10-year) payment plan, you’d pay $460 per month. Pay-as-you-earn would reduce this to $270 for a borrower who earns $50,000 per year, and the “extended graduated” option would reduce the payment even further to $227.
It’s worth noting, however, that these plans can result in lots of additional interest over the course of the loan. In this example, the standard repayment plan would cost about $15,200 in interest, while the extended graduated option would produce more than $50,000 over its 25-year repayment period. So, this needs to be taken into consideration before deciding on a repayment plan.
Finally, if you can’t find a payment plan that meets your needs, you could apply for a deferment or forbearance. A deferment can be obtained for up to three years during times of unemployment or financial hardship, and during the deferment period, you can suspend your monthly payments entirely. Plus, if you have any subsidized loans, the government may even pick up the interest payments. If you can’t qualify for a deferment, forbearance can be obtained for up to 12 months, and can postpone your payments (although interest keeps accruing) until you’re in a better financial position.
While it’s important to keep in mind that all of these options won’t get rid of your debt any faster and can result in thousands of dollars in additional interest, the point is that there are many steps you can take if you’re having trouble paying your loans back.
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