Many of you have probably heard that a college degree (Bachelor’s) on average increases an individual’s lifetime earning significantly. Versus a high school diploma only, we’re talking the difference between $1.1 million and $2.2 million. That ain’t chump change.
If the typical student loan repayment of the average student loan debt ($28,000) is about $295 but the degree typically returning an additional $1,5000 a month or so to the graduate in higher income, why is there such an uproar about the amount of student loan debt our college kids are getting into?
Here are a couple of issues to keep in mind:
- First, not everyone with student loan debt graduates from college. Just because we don’t earn our degree doesn’t mean we don’t have to pay back our debts. We most certainly do. Even filing for bankruptcy typically fails to get rid of student loan debt.
- Second, not everyone gets a job right out of college. While student loans usually allow the student a 6 to 9 month grace period (deferment) before a payment becomes due, the typically graduate needs at least 3 months if not 9 to land themselves a permanent (relatively speaking) job. Meanwhile, they may be digging themselves into credit card debt.
- Lastly, it’s human nature to be optimistic. Those who are about to graduate not only overestimate their annual salary after graduation, but they also begin acquiring things (furniture, clothing, electronics, etc.) with the assumption that they’re be able to afford them with their new income. Such grads quickly learn that they’ve hopped on the consumer treadmill of living paycheck to paycheck and don’t have a way of getting off without cutting back on their lifestyle.
So what are your options if you do have student loans that you’re having trouble repaying? First a note: your repayment and payment alternatives can depend directly on the type of student loan you have and when you originally got that loan (e.g. Stafford vs. Perkins vs. Private, and before ’87, before ’93, before ’97 or after ’97). The following is a general approach to dealing with student loans and is not individual advice:
- Standard Repayment: This involves making a monthly fixed payment, usually for 10 years to pay off the debt. This method is usually the preferred method since it involves paying the least amount of interest while also paying the full loan balance.
- Graduated Repayment: Also usually a 10-year repayment plan, the payments early on are lower than those near the end of the term. This plan may work well for those expecting to earn very small salaries early on in their careers but who also expect to dramatically increase those salaries within the next decade. Keep in mind, though, that making smaller payments early on when the principal balance is higher means the loan is generating higher interest you’ll have to pay in the end.
- Extended Repayment: For student loan borrowers with more than $30,000 of debt, this option allows the debt to be repaid (either on a fix or graduated monthly payment) over a much longer period of time, even up to 25 years. Of course, the longer you take to repay your debts, the more interest you pay, which may be significant. For example, a 10 year standard repayment of $50,000 at 6% interest would involve monthly payments of around $566. On a 25-year extended repayment plan, the monthly payments might be just $326. However, repaying on the standard plan will mean the total repaid, including interest, would be nearly $68,000 ($18,000 in interest). On the 25-year extended plan, that would just to nearly $98,000 (or almost twice the original amount borrowed)!
It Pays to Repay Fast!
- Income-related Repayments: These options (income sensitive, income-contingent, income-based, and Pay as You Earn), whose monthly payments are determined by the borrower’s income might extended the repayment term to up to 15 or 25 years, might provide for any remaining balance at the end of the term to be forgiven, and might require annual applications. Their qualifications also take into account the type of loan(s) the borrower has. As with all loans, these can end up costing much more in the end since the interest is often capitalized regularly into the balance. Also, any forgiven amount of the loan is usually considered taxable income.
- Deferments: If you qualify for a deferment, your lender is required to offer it. However, it does not usually happen automatically, unless you re-enroll full-time in a qualifying school. Deferments (when no payments are required yet the borrower remains in good standing with the lender) do not necessarily mean that your loan balances are not increasing. If the loan is unsubsidized, the interest will capitalize (be added into the principal) regularly. You may qualify for a deferment if you are going through a financial hardship (unemployed or low-income), have re-enrolled full-time in a qualifying educational program, are going through a rehabilitation program, or are on active military duty. Older loans (say 1993 and older) have more deferment options, but they’re rarer all the time. Finally, if the loan is in delinquent (usually meaning a payment is 270 or more days late), deferment will likely not be an option.
- Forbearance: If the borrower does not qualify for a deferment, they may try to get a forbearance for one to twelve months. No payments are required during a forbearance, but interest is capitalized, even for subsidized loans. The lender is usually not required to offer a forbearance, even if you qualify for one, except in cases of bankruptcy, permanent disability, or death (which often lead to a discharge of the debt). The borrower must request a forbearance.
- Forgiveness: I’ve heard a lot of talk in classrooms and in social media over the past couple years about opportunities to get your student loan debt forgiven all together. Some, if not most, of these “opportunities” advertised online might say that the president has made it possible to get your student loan debt forgiven. Legitimate lenders (who are the ones making such decisions) don’t go around advertising these options. That said, there are several situations that might qualify you for a full or partial loan forgiveness, including working in the public service sector for a certain number of years while also making 10-years worth of on-time payments, teaching in a low-income (Title I) or Bureau of Indian Education school for five consecutive years, and meeting certain requirements under the income-related repayment plans for 20 to 25 years. That said, loan forgiveness is much less common and harder to qualify for than the online advertisers would have us believe.
This is a massive topic, too massive in fact for a blog post or even a series of blog posts. If you’d like more information, though, please feel free to contact us toll-free at 877-688-3328. You might also consider viewing the following resources:
- Perkins Loans – SALT
- Perkins Loans – US Department of Education
- Direct Loans – SALT
- Direct Loans (general) – US Department of Education
- Direct Loans (federal programs) – US Department of Education
- Private Student Loan – SALT
Have a great week!