Paying off student loan debt can be a long, complicated, and often arduous enterprise, one that can put significant pressure on an individual’s finances, influence major life decisions, and put healthy credit at risk: it’s estimated that about seven million of the nation’s borrowers are in default. With so much at stake, how can borrowers best manage their student loan debt?
For expert guidance, we turn to attorney Heather Jarvis, a student loan expert who knows what it is to pay down hefty student loan debt: she graduated Duke University School of Law with loans totaling $125,000. Jarvis has specialized in student loan education for nearly a decade, working with universities, professional advisors, and borrowers.
Here, Jarvis points the way to vital resources and shares her expert insights into how to best manage student loan debt.
The Reality Check
Four-year college graduates continue to experience far less unemployment and earn higher salaries than those with only a high school education. In 2012, the unemployment rate for college graduates was less than half the rate for high school graduates.
But higher education is expensive and scholarship and grant aid has failed to keep pace with rising tuitions. In the United States today, there are approximately 37 million student loan borrowers who together owe more than one trillion dollars. Seven in 10 college seniors who graduated in 2012 had student loan debt. Those who had debt owed an average of $29,400.
1. Know Your Loans
If you need to borrow for school, look first to federal student loans. Private loans are not backed by the federal government and are more risky and expensive than federal loans. All college students should fill out the Free Application for Federal Student Aid (FAFSA); submitting a FAFSA is necessary for participation in any federal student aid program, even those that do not depend on financial need.
Avoid misunderstanding the key differences between your loans by getting a clear inventory of what you owe. Check out the National Student Loan Data System at www.nslds.ed.gov to find a complete listing of all your federal student loans. You will need your Federal Student Aid PIN to access your information.
If some of your loans aren't listed on the National Student Loan Data System, they are probably private student loans. Pull a recent copy of your credit report from www.annualcreditreport.com to see a listing of all your creditors including private student lenders, and note the balance and lender contact information for your private loans.
2. Stay in Touch with Your Loan Servicer
Loan servicers send lots of important information to borrowers including information about when your payments begin and how to select a repayment plan. If you miss your servicer’s communications, you may be enrolled in a repayment plan you don’t like or be late on payments. That can be expensive for you.
Steer clear of problems by updating your lenders and loan servicers with any new phone numbers, email addresses, and mailing addresses. Not sure which company is your loan servicer? See the steps for getting an inventory of what you owe above.
3. Pick the Right Repayment Option
Choosing a repayment plan can be confusing, so take some time to fully understand the trade-offs between the different options. The Department of Education provides information and calculators regarding the various repayment options online at studentaid.ed.gov/repay-loans.
These are the highlights:
Standard Repayment
Standard repayment (for a loan that isn’t consolidated) means that you’ll pay equal monthly payments over a ten-year period. Monthly payments may be high, but because you’ll pay off your loan quickly, you will pay less interest.
Income-Driven Repayment Options
If your debt is relatively high as compared to your income, the income-driven repayment plans provide significant advantages. Monthly payments are established as a percentage of income so that when you don’t earn a lot, your payments are low. But the income-driven options have the disadvantage of requiring annual income verification and other paperwork, and because monthly payments are low, interest charges will be correspondingly high.
4. To Consolidate or Not to Consolidate
A consolidation loan combines multiple loans into one loan with an interest rate based on the weighted average interest rates of the underlying loans. Consolidation is not necessary or important for most recent student loan borrowers, but some borrowers can access more beneficial repayment and forgiveness programs by consolidating older federal loans. Take some time to fully research the pros and cons of consolidation before making a decision about whether consolidating makes sense for you.
Beware of consolidating federal loans into a private student loan: you'll lose all the repayment options and borrower benefits - like unemployment deferments and loan forgiveness programs - that come with federal loans! Read all the fine print and don’t expect to find low or fixed interest rates unless you have excellent credit.
5. Stay out of Trouble!
Approximately 85 billion dollars of outstanding student loan debt is past due. Two out of five student loan borrowers are delinquent at some point in the first five years of repayment. Students who drop out of college before earning a degree typically struggle most with student loans.
Talk to your lender or loan servicer right away if you are having trouble making payments. Federal loans offer flexible solutions including temporarily suspending or reducing payments. Ignoring your student loans can cause your total loan balance to become due, ruin your credit score, result in garnishment of your wages, and dramatically increase the total amount you pay. You have many more options before default, but there are options for curing federal student loan default, stopping collection efforts, and restoring eligibility for federal financial aid. Find helpful information at studentloanborrowerassistance.org.
6. Loan Forgiveness
Public Service Loan Forgiveness is a federal program that forgives student debt remaining after 10 years of qualifying payments for people in government, nonprofit, and other public service jobs. Additional loan forgiveness programs are available for borrowers working in certain fields (like teaching, military service or medicine). Find out more at studentloanborrowerassistance.org.
7. Know Your Resources
http://www.nslds.ed.gov: The National Student Loan Data System for a complete inventory of your federal student loans.
https://www.annualcreditreport.com: Free credit report for an inventory of your private student loans.
http://www.studentloanborrowerassistance.org/: Information from the National Consumer Law Center including avoiding and getting out of default, and dealing with collections agencies.
http://www.studentaid.ed.gov/: Comprehensive federal student aid information and loan repayment calculators from the U.S. Department of Education.
http://www.studentloans.gov: Tools for managing federal student loans including access to your account information and repayment estimator from the U.S. Department of Education.
http://www.consumerfinance.gov/paying-for-college/repay-student-debt: Student loan decision tree from the Consumer Financial Protection Bureau.
http://askheatherjarvis.com: Free tools and resources for high-debt student loan borrowers with a focus on income-driven repayment and Public Service Loan Forgiveness.