According to the Consumer Financial Protection Bureau the US student loan debt has grown to over $1.2 trillion dollars. Student loan debt is second only to home mortgages. The average student will borrow $26,600 and one out of every ten graduates will accumulate over $40,000 of debt. Only 1% of student debts will run over $100,000 or more.
If you are considering a student loan there are basically two avenues to choose from; private and federal. According to Lauren Asher, president of TICAS, a nonpartisan policy group, federal loans are still the best way for students in need of funding their education. One of the many reasons for this is due to the options students have when they are in need of debt relief or assistance in paying back their student loans.
Private VS Federal Student Loans
The options for paying back a federal loan are different from a private loan and about 50% of the students who are opting for private loans have not maxed out on the options for federal loans.
If you are a student considering a loan it’s a good idea to understand the difference between obtaining a federal loan verses a private one. In addition, if you have yet to obtain a loan for your schooling, knowing how obtaining a loan can affect your financial future is just as important.
There are two main benefits to federal loans that private loans do not offer. Federal loans offer fixed interest rates and take nine months to a year before going into default. Private loans can default after just one missed payment.
Defaulting on a loan, any type of loan, will affect your credit rating. In turn, this will affect future credit choices. When considering student loans, and the consequences of defaulting, think long-term; how will this affect my future decisions like qualifying for a home loan, a new car loan, even applying for a job?
If you have already taken out a student loan and are having financial difficulty in paying it off, take heart, there are many ways you can qualify for short term or even long term help.
For students that have accumulated multiple private loans, debt consolidation can help by reducing the total monthly payments into one payment, lowering the payment amount, and offering a 30 year fixed rate. However, these types of loans are not eligible for debt consolidation unless they meet certain requirements.
Some of the requirements include your credit score, type of degree obtained, annual (provable) income, and personal savings. When considering your financial situation, lenders will consider your debt to income ratio as well as the percentage of debt that exists on your credit cards.
One of the lesser-known criteria that creditors are looking for is that of keeping ones credit card debt to less than 70% of the maximum available. Going over this percentage most likely means you will not qualify even if your credit rating is better than average.
Debt consolidation can be a financial life-saver, however, many debt consolidation programs require an upfront fee to get started. Be sure you know the details of the type of loan you have acquired and what options you have before you make any financial commitments in consolidating your loans.
Federal Loan Consolidation
If you are a student with multiple federal education loans, the first place to look is within the financial aid department. Many students are unaware of the help available here. Don’t let embarrassment or fear prevent you from consulting with a financial aid advisor, they are right on campus.
The US Department of Education offers students the ability to consolidate multiple loans into one. The benefits to the student include; making just one payment, lowering the monthly payment, and extending the life of the loan. There is no fee for this type of consolidation. You will only have to pay fees if you seek out private debt consolidation companies or banking institutions.
Before considering debt consolidation, remember that extending your loan period means you will be paying more interest over time. Make sure you consider all the available options before you make any decision that will affect your financial future.
Student Loan Term Adjustments
Many times our financial situation is temporary. Difficulty finding adequate employment, loss of a job or the inability to work may place a hardship on our finances. If you have federal student loans you can qualify for help during financial difficulties. This provision is called deferment.
Deferment of Monthly Payments
Many students fall into financial difficulties. If you find yourself in this situation you may choose to defer your monthly payments. The obvious benefit to this is gaining a few months to sort out your finances. Another benefit, though not applicable to all loans, is the federal government may pay the interest during this time period. However, if you have an unsubsidized or plus loan, the government will not pay the interest during your deferment. If possible, it’s a good idea to pay as much of the interest during your deferment as you can afford. While you are not required to do so, if not paid it could be added to your principal and the total amount you owe may increase.
Of vital importance is communication with your financial lender. The deferment provision should not be used frivolously. Simply skipping out of making payments because you think it will not reflect on your credit or cause you any legal issues for 9 months or longer does not work in your favor.
To learn more about qualifying for a deferment contact your loan service provider or the financial aid department.
Up to 12 Months of Forbearance
Forbearance is available for students that do not qualify for deferment. If you qualify for forbearance you can stop making payments or have an adjustment to lower your monthly payments for up to 12 months. During this time the interest will accrue. You can request forbearance due to financial hardship and/or illness.
Mandatory forbearance means that the lender must comply with this request for temporary relief from your financial loan obligations. There are many ways you can qualify for mandatory forbearance.
If you are serving in a medical or dental residency or internship that meet certain criteria. There are some financial debt to income ratio criteria that can also qualify you to receive a mandatory forbearance. Contact the financial aid or lending department to learn if you meet any of the qualifications for this type of relief.
Lowering Monthly Payments with Repayment Plans
If you do not qualify for deference or forbearance, you can look at a repayment plan. There are several different types of repayment plans. With this type of plan you can lower your monthly payment by extending the lifetime of the loan. Another option is to lower the payment for a few years and increase the monthly payments over time or the monthly payment plan can be adjusted according to your monthly income.
Look realistically at your own finances and what adjustments you can make to remain in good standing with your current lender. There are many ways to decrease the stress of financial obligations by examining current bills and making financial adjustments where possible.
Public Service Loan Forgiveness
There are many public service jobs that may allow you to have your debt forgiven. However, as with any type of debt cancellation, you will need to meet specific criteria to qualify. Only specific repayment plans allow you to obtain this type of loan cancellation. In addition, you must not be in default on your repayment loan and you must have made at least 120 payments as of Oct 1, 2007.
Professional Financial Advice
It’s important to take your financial situation seriously. If you are facing financial hardship due to student loans it’s important not to panic. Seek out a qualified financial advisor. This could be someone who offers free advice, like the financial aid department on campus. Or you may find that someone who, for a monthly fee, can help keep track of your finances.
Above all else, don’t panic. If you find yourself in a desperate financial situation because of student loan debt don’t assume the only option is default or bankruptcy. Before thinking about filing for bankruptcy or chapter 13, be sure to consider all of your available options.
Sometimes bankruptcy and/or chapter 13 may seem like the easy way out of overwhelming student loan debt. However, while not impossible, it is not easy to qualify for either one. Before taking such a drastic step in your financial situation, it is advisable to talk to a qualified financial advisor so that you know the short and long term consequences of those decisions.
And remember, not all options available to you are listed within this article. The most important place to start in order to understand what your options are is with the lender.
If none of the above options will work for you, consider making an appointment with a qualified financial aid counselor. The advice you receive will help you locate other financial aid options and help you avoid falling prey to online internet scams or other programs offered that would create more harm than good.