Don't Wait For Student Loan Forgiveness
While many people are still reeling from November's election results, there's no doubt individuals on both sides of the political aisle are wondering what will happen to their student loans under a Trump presidency.
Politicians threw around a lot of exciting ideas during party primaries and election season, including free college for all, discounted tuition and complete loan forgiveness.
If you're one of the 44 million people with student loan debt, the idea of nationwide loan forgiveness is really appealing.
One of the most common inquiries I get each day is from people wondering if it makes financial sense to delay their debt payoff and wait for forgiveness, rather than making payments now.
While there may be changes to the student loan system on the horizon, putting all your hopes on loan forgiveness isn't a good idea.
Here are fives reasons why you shouldn't stop paying your loans, and how to better manage financing them:
1. National student loan forgiveness is unlikely to happen.
Student loans are a huge obstacle for borrowers... even surpassing auto loans and credit card debts as the biggest debt burden.
Student loan debt now totals $1.26 trillion. If that amount were eliminated overnight, it would be a colossal expense to both federal government and private lenders.
They would have to make up that money elsewhere, either through tax hikes from the government or rate increases and added penalties from banks.
The issue is also a major point of contention among political parties.
While some may sell the benefits of eliminating student loans, many are against complete loan forgiveness. That division makes nationwide loan forgiveness unlikely to occur.
2. Not paying your loans can haunt you.
Not only is complete loan forgiveness unlikely, but ignoring your loans in the hopes they'll disappear someday can also seriously hurt you.
After 270 days of missed payments, the lender considers your loans to be in default. Defaulting on your student loans can wreck your credit, making it difficult to find an apartment, get approved for a car loan or even get a credit card.
Also, many lenders turn to collection agencies to get their money back, so you can also get hit with collection charges.
For federal loans, the fees can be as high as 18.5 percent of the principal and interest. That's a lot of money added to your balance.
When your loans are in default, your lender can garnish your wages. This means they can take a big chunk of your salary out of every paycheck.
In fact, the government can make your employer withhold up to 15 percent of your paycheck to go toward your debt.
3. Look into income-driven repayment plans.
Income-driven repayment plans are available to people with federal student loans. With these programs, your repayment term is extended and monthly payments are capped, thus reducing your monthly bill.
Because lenders determine the monthly payment based on your current income and family situation, your payment can be very small: even $0.
There are currently four different plans available.
With a Revised Pay As You Earn (REPAYE) plan, your monthly payment is capped at 10 percent of your discretionary income, and your repayment term can be as long as 25 years.
Under the Pay As You Earn (PAYE) program, your payment is capped at 10 percent of your income, and your repayment term is 20 years.
With Income-Based Repayment (IBR), your payments are 10 percent of your discretionary income, and you have 20 years to make payments.
Under an Income-Contingent Repayment (ICR) plan, you pay the equivalent of either 20 percent of your discretionary income or the payment on a fixed, 12-year repayment schedule, whichever is less.
4. Refinance your student loans.
If you're struggling with your debt, it's easy to feel overwhelmed.
Especially early on, it can seem like you're not making any progress on your loan balance after interest is applied.
One option that can help is refinancing your student loans.
With refinancing, you essentially take out a new, private loan to pay off your existing loans. The new loan should have more competitive terms, like a lower interest rate and/or different repayment period.
By reducing the interest you're charged, you can pay off your loans faster and save thousands over the length of your repayment period.
But refinancing isn't for everyone. You lose out on some perks if you refinance federal loans – like income-driven repayment plans – so it's a decision you should make carefully.
5. Public service loan forgiveness (PSLF) exists.
A nationwide student loan forgiveness program might not happen anytime soon, but that doesn't mean you can't get some of your student loan debt forgiven.
If you work for a qualifying non-profit or government agency for 10 years and make all your payments during that time (beginning after October 2007), your remaining loan balance could be forgiven under PSLF.
This option is a great way to do meaningful work you love while wiping out your student loan debt.
Even though dealing with student loans can be stressful and overwhelming, ignoring them will only make the issue worse.
Take action now by working with your lender to get on an alternative repayment plan, or refinance your loans to avoid getting into default.