Over the next few months the student loan grace periods for graduates of the Class of 2012 will start expiring, meaning a whole new cohort of borrowers will be starting the debt payment process. ReadyForZero's Benjamin Feldman answered a few questions for those 2012 grads (and anyone else ready to tackle their student loans).
What type of student loans do I have?
It's important to understand the type of loans because each one has different rules and may be more flexible or more rigid when it comes to repayment terms. There are three main types of loans:
Federal Direct Student Loans: As the name implies, these are loans you borrowed directly from the U.S. Department of Education. These tend to have the best terms (i.e. lowest interest rate and more flexibility). You may have both subsidized and unsubsidized direct loans, with the difference being that the government pays your interest on the subsidized loans while you're in school or on a grace period.
Government-Backed Student Loans: These loans are a hybrid; you borrow from private lenders, but the federal government backs the loan so the lender doesn't take on any risk. These used to be granted through the Federal Family Education Loan (FFEL) program. However, these loans are no longer available as of June 30, 2012. Now, all new federal loans are direct loans.
Private Student Loans: As you might imagine, these are loans you borrow from a private lender, with no government involvement. In general, interest rates on private loans tend to be higher than direct loans. Most private student loans have variable interest rates, meaning the interest rate can be raised (or lowered) over time, but, there are also a growing number of private student loans being offered at fixed interest rates.
So which kind do you have? If you're not sure, you can pull one of your monthly statements out of the filing cabinet or use the National Student Loan Database to verify the amounts and types of each student loan.
Once you've done that, you're ready for the second question...
How do my interest rates compare?
This is an important question because the quickest way to pay off your total debt is to pay off the account with the highest interest first. Some subsidized government loans, including the subsidized Stafford Loan, can have interest rates as low as 3.4%, while some private loans have interest rates that are 12% or higher.
So once you've figured out the type of student loans you have, make sure you understand which ones have the highest interest rates and how you can reduce those if possible. One thing you should try immediately is to ask the lender for a 0.25% interest rate reduction if you set up direct deposit for your monthly payments. It may not seem like much, but with a large loan amount and many years of compounding, that 0.25% can add up fast.
(And you can use ReadyForZero to visually coordinate all your loan payments in one place and make a plan to pay them off as fast as possible.)
What if I can't make my monthly payments?
If you can't make your minimum payments, you're not alone. However, you can't afford to do nothing. You must be proactive to find a course of action that works best?because if you simply stop paying your loans, you will eventually go into default.
And going into default is serious because it means your entire loan balance would then be due immediately, and your debt would be handed over to collections. Default can even result in garnishment of your wages. (Remember, it's uncommon for student loans to be discharged through bankruptcy.)
However, fortunately, there are ways to avoid this outcome. For one thing, you can generally ask your lender for a period of forbearance, in which case you would not be required to make monthly payments for a certain period of time (but would continue to accrue interest). And you can apply for deferment if you are enrolled in a graduate program, are unemployed, or are on active duty in the U.S. military.
But perhaps the best option of all, particularly if you can make lower monthly payments, is to adjust the repayment terms for your loans. With federal loans, you can apply for the Income-Based Repayment program, which caps your monthly required payment at 15% of your disposable income. That way, you can still make your monthly payments, but you will have to pay for 25 years before the remaining balance is forgiven.
If you have private loans, ask your lender if they have a program similar to Income-Based Repayment. Many of them will work with you to adjust your repayment plan.
Is there an easy way to pay off student loan debt?
It depends on your definition of "easy." But actually, yes, there are some surprising ways to take large chunks off your debt amount.
If you work in a non-profit or government job, then you can apply to have your student loan debt completely forgiven within 10 years. That's possible through a program called "Public Service Loan Forgiveness," which provides extra incentives for graduates to work in jobs that give back to their communities. To see the list of eligible jobs, use this government site.
A more unique and surprising way to get your debt paid off is to move to a city that will help you pay off your loans. Niagara Falls, New York, has a new program in place that will pay $3,500 per year (for two years) to recent graduates who move there and establish residence. Similarly, 50 counties in Kansas are offering up to $15,000 to pay off student debt for new residents. And these two programs could be just the first of many, as smaller cities turn to innovative methods of revitalizing their communities. Which could help you make a big dent in your total balance!
Is consolidation a good option for me?
Finally, you should be aware that consolidating your student loans might be a very good move on your part. When is consolidation a good choice? Well, if it can help you lock in a lower interest rate or make it easier for you to organize your loan payments (or both) then it's worth considering. The federal government makes consolidation loans through its Direct Loan program. While it's not right for everyone, it may be worth looking into.
Private lenders also offer consolidation loans. As with federal consolidation loans, you should make sure to research the options thoroughly to see if you can obtain a lower interest rate and if the terms of the new loan fit your situation better than the loans you have currently.
No matter what, it's always better to be proactive when dealing with your student loans?and if your grace period is about to end, now is the perfect time to take charge.
Benjamin Feldman is a personal finance expert at ReadyForZero who recently used the tips above to pay off his own credit card. You can follow him on Twitter @BWFeldman and read more of his work at the ReadyForZero blog.
Image remixed from olly and James Steidl (Shutterstock).
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