Student loans are a 1.5 trillion dollar problem in the United States. That’s $620 billion MORE than the total credit card debt owed, and credit cards are supposed to be the bad guys here. Borrowers are burdened with the stress of making monthly payments coupled with a disorganized system of government organizations and hired loan servicers who are notoriously error-prone.
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My guest is student loan expert Heather Jarvis. She walks us through the different payment paths borrowers can take and is amazing resource for all things student loans.
Things to keep in mind when facing crushing student loan debt!
1. You ALWAYS (almost) have options. There are several government plans that allow you to make lower payments and may even eventually lead to loan forgiveness.
2. You are not alone and having student loans will not completely ruin your life. Take a deep breath and call your loan servicer to discuss your options. It’s going to be annoying and painful but try doing it with a trusted friend on speaker phone so it’s not so scary.
3. Just like you can pay someone to do your taxes, there are people out there you can pay to help you navigate this very expensive and complicated problem. Heather recommends PG Presents.
4. If you enter into one of the government-sponsored repayment plans (IBR, REPAYE, etc.) you are not bound forever. You may exit the plan and pay down the debt with found money, but keep in mind your interest may have ballooned because you were making very low payments for years that barely covered the principal.
5. You are always permitted to pay MORE than your calculated payment. The amount due is just the minimum payment the servicer will accept. Paying more will pay your debt down faster if you can afford it.
Terms You Need to Know
IDR
Income Driven Repayment plans are repayment options for borrowers with federal loans. They have names like IBR, PAYE and REPAYE. There are different terms and details but basically your new monthly payment is based on 10% or 15% of your discretionary income (that’s your salary minus the federal rate of about $18,000). You’ll make this new payment for a term of 20 or 25 years and your remaining balance will be forgiven. The debt that is forgiven will be taxable to you.
Capitalization
Unpaid interest gets added to the principal. Avoid this if at all possible. You will end up paying interest on interest.
Deferment
Hard to get. You have to be in school or unemployment. Better than forbearance because if you have subsidized loans, the government pays the interest on those loans while you’re in school or in deferment.
Forbearance
Stops the payments when a borrower is unable to keep up with payments. Pretty much anyone can qualify but interest will accrue.
Consolidating
You get a FEDERAL consolidated loan. This new loan repays one or more of your federal student loans. It’s always federal. It’s confusing because consolidating used to be very important but these days consolidating is not as important because consolidating does not change your interest rate (the new interest rate is a weighted overage of the loans you’re consolidating) or how much you owe. The main reason to do it today is if you have OLDER student loans like FFEL loans which won’t allow access to the repayment plans.
Refinancing
Similar in concept to consolidating but usually through a private lender like a bank. Be cautious with private refinancing because you lose access to the flexibility of payment plans available to federal borrowers (REPAYE, Public Service Loan Forgiveness). Good for people with solid incomes and credit scores.
Public Service Loan Forgiveness
You must keep meticulous notes and be 100% absolutely certain that you have the “right” loan and the “right” payment plan. If you have a qualifying job as a teacher, non-profit worker, or other approved occupation, you must make 120 ON TIME payments and your loans will be forgiven at the end of 10 years and the balance is FORGIVEN TAX FREE. There are so so so many rules but if you have a public service career, this is a very effective strategy. Heather’s site is amazing. So is Student Aid.ed.
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