Student loan debt has found its way into the center of political debates and into the lives of nearly two-thirds of American college students. Forbes called student loan debt a ‘1.6 trillion crisis.’ On the most recent episode of the Financial Sense Newshour’s Millennial Monday podcast, Crystal Kessler and Josh Nunn explain how you can make your student loans work for you. They outline the seven most common mistakes around student loan debt and break down seven practical ways you can take control of your student loans.
See Making Student Loans Work for You for audio.
Seven Mistakes You Don't Want to Make:
- Selecting the wrong repayment plan
- Missing opportunities to save money
- Failing to update your contact information with the lender
- Refinancing student loans without checking if it saves money
- Defaulting on loans
- Deferring and/or missing debt payments
- Counting on bankruptcy or loan forgiveness
Seven Ways to Take Control of Your Student Loans
Below are tips and tricks Crystal and Josh provide on the podcast about how you can combat these common mistakes and make sure your student loans are working for you.
Your very first step is to organize your student debt. Determine what loans you have, their interest rates, the term on each loan, the payment and when each payment is due. Around 90 percent of student debt is in the form of federal loans which are managed by a few specific loan servicing companies such as Nelnet, Greatlakes and Navient. If you’re unsure who your loan servicing company is you can log in to the National Student Loan Data System to find out. If you do have private loans, you should know where to go to get the information you need on them, but you can access your credit report from AnnualCreditReport.com and any private loans will be listed there.
Set Your Monthly Payment
You’ll want to determine what an affordable monthly payment will be for you. A general rule of thumb is your combined housing and debt payments should not be more than 40 percent of your gross income (your total pay before taxes and other deductions). We know this isn’t always possible, and if that's the case you might want to consider an income-driven repayment plan.
An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. You can find out more about this option on the Federal Student Aid website. It is important to note that reduced payments can increase the amount of interest you’ll pay on the life of the loan. You might end up paying more over time due to increased interest payments, but an income-driven repayment plan is still an excellent option if it makes the monthly payments more affordable for you.
It’s estimated that 70 percent of borrowers who defaulted on their federal loans earned incomes that were low enough to have qualified them for income-based repayment plans. Defaulting on student loans is costly and can result in high fees and low credit scores. Student loans also cannot be discharged through bankruptcy. So, you don’t want to miss a payment or default on your student loans, and if the monthly payment is more than you can currently afford, consider an income-driven repayment plan.
Create a Payment Plan
Corral all your balances in one place so that it’s easier to look at the big picture of where you are with your student loan payments. Consolidating your federal student loans not only makes life easier, it could also lower your interest rate. Another benefit to consolidating is that most lenders will adjust your due date so that you can make all your payments on the same day. It’s important to also note that if you consolidate all your federal loans into one, the interest rate will be the weighted average of all the interest rates on the loans being consolidated rounded up to the nearest 1/8 percent.
Pay Highest Interest Rates First
Any loans with interest rates higher than seven percent are good candidates for early repayment. If you’re able to, making extra payments can save you a lot of money when it comes to interest and, of course, you’ll be able to pay off the loan faster.
Another frequent question that goes along with this is if someone should pay off their student loans early. Like most things in life, there’s not one answer and a lot depends on your financial situation. Paying off student loans early frees you from debt faster and provides a guaranteed return on your money by saving thousands of dollars in interest.
Now, a reason you may not want to pay off your student loans early is that money spent paying off loans early is money that's not being saved in an emergency fund so you don’t incur more debt down the road (and debt that will likely be at a much higher interest rate). It's also money that’s not being invested in the stock market (earning returns). However, in most situations it's still advisable to pay off that student loan debt before investing. You can read more about this here.
Can You Reduce Your Payments?
If over 40 percent of your gross income (total pay before taxes and other deductions) is going to housing costs and debt payments, there are a few things you can do. The first method is deferment which suspends your loan payments without harming your credit score. However, you’ll still be incurring interest on these loans, so this option is best suited for those with a lower interest rate.
Another approach is an income-driven repayment plan. As discussed above, this method allows you to reduce your monthly payment to as low as 10 percent of your monthly income. You can also consolidate your federal student loans. This allows you to combine all your loans into one thus creating one monthly due date for all loan payments.
Refinance Your Student Loans
When you refinance your loans, a lender will give you one big loan that will be used to pay off all your student loans. You’ll then be making one payment on this new loan (with a lower interest rate) and your student loans will be paid off. Refinancing requires you to qualify so you’ll need a stable job and good credit score or credit-worthy co-signer. If you do refinance your student loans, you won’t be eligible for student loan forgiveness or be able to switch to an income-driven repayment plan.
What About Student Loan Forgiveness?
Commonly referred to as PSLF, the Public Service Loan Forgiveness program forgives the remaining balance on your Direct Loans after you have made 120 (10 years) qualifying monthly payments while working full time for a qualifying employer. Qualifying employers include government organizations, 501 (c)(3) organizations, other not-for-profit organizations that provide a qualifying public service as its primary service, as well as Peace Corps and AmeriCorps volunteers.
Find out more about qualifying for PLSF here.
We know student loan debt can feel overwhelming, but if you make to sure to follow these steps and create a plan, you’ll be off to a great start. Be sure to listen to Crystal and Josh’s full podcast that goes into even greater detail about making your student loans work for you.
Still have questions? Contact an advisor at Financial Sense Wealth Management today.