The Student Loan Crisis: How You Can Cheat The System
“I’m a fool, hundred thou to go to school. So much debt left me and my mama damn near drowning in a pool. First to go to college, they say knowledge is a tool” -J. Cole, “I’m a Fool” 2012
There are some situations in which ignorance is bliss, but this is not one of them. Failure to address mounting debt or to have a plan in place for payments can lead into a destructive spiral of deferment, delinquency and default.
You're not alone here. I just graduated with my bachelor's degree, and have $22,000 in government loans that I need to start making payments on this winter. Somehow my debt is slightly below the average for my class, as the average 2013 college graduate debt is $26,000.
America’s student loan debt is now the second largest form of debt in the country, surpassing credit card debt on its climb to $1,000,000,000,000 (1 Trillion), trailing only mortgages. Of that $1 Trillion of student debt, only $150 Billion is privately held, leaving the other $850+ Billion in student loans on the government's account.
Recent college graduates face a whole host of problems: 10% unemployment, frequent underemployment, expensive and limited housing, adjusting to life out of college and living alone. Don't ignore your college debt and let it blindside you down the road.
Here’s what you can do to stay on top of your debt payments and prevent it from wrecking your life:
1) Organize. Know who you owe and how much. Keep all of your login information centralized. It may be intimidating to confront your debt, but it will save you tons of money and years of stress. https://www.nslds.ed.gov/
2) Make your payments! Most loan companies offer a decrease in interest rate for debtors who sign up for automatic payments. Signing up for this will make sure you never forget a payment and will also save you money and time by decreasing interest rate. Contribute whatever extra you can, whenever you can! Paying an extra $5 a month for just one year at a 6% interest rate will save you $30 over 5 years, and $60 over 10.
3) Don’t treat all debts the same! There are two main philosophies here: either pay off your loans from smallest to largest (“snowballing” payments) or pay off the loan with the highest interest rate first. Both are better than paying minimum on everything, and the snowball method has the benefit of quicker tangible progress and decreasing monthly payments. Paying off loans by order of interest rates, however, will save you the most money and help you finish fastest. Private loans tend to have higher interest rates than government loans, as do credit cards, so don’t put Uncle Sam first.
4) Explore all payment options; Federal loans have 5 different payment schedules. You have to demonstrate varying degrees of financial hardship to qualify for the plans, and the plans are designed so that the standard plan costs the least in total.
The standard plan calculates the minimum average monthly payment, factoring in interest you will have to make to finish paying it all off at the end of 10 years.
A “graduated” plan makes smaller monthly payments initially while gradually increasing the payments over time, assuming that wages will also be increasing. The graduated plan still finishes in 10 years, but ends up costing more.
Income Contingent Repayment (ICR) pegs the monthly payments to the borrower's income, family size and total amount borrowed. Adjusted annually, whatever debt left over after 25 years of payment is discharged (forgiven).
Income Based Repayment (IBR) is set up similarly to ICR, pegged to income, family size and amount borrowed, with the 25 year plan and debt forgiveness at the end. Generally speaking, the IBR is a better plan, as the government pays the remaining unpaid accrued interest on your subsidized loans for up to three consecutive years from the date you begin repaying the loans under IBR. Unpaid interest, unlike with other plans, does not get added to the capital (amount interest gets charged on) for as long as you are in the plan.
Pay As You Earn (PAYE) is a new design, only open for people whose loans occurred after 2007, and has a similar payment scheme as ICR & IBR. A primary difference is that PAYE is scheduled for 20 years, and outstanding debt at that point is forgiven.
5) Figure out how debt and debt payments figure into tax returns. Interest on student debt can be claimed for tax credit most of the time, especially when making below $60,000, which statistically almost all of us are. Varies tremendously on a case by case basis, so try and talk to a tax professional, and be sure to have your information accessible!
Well that's basically all you can do, other than become an expat or die. Here are some D's you should know about as well.
Delinquency- not a huge deal if you are a little late with your payment. If you let it slide too far, however, it will start to ravage your credit score. The threshold for that is 90 days.
Deferment- can be a very useful tactic, particularly if you are continuing your education or struggling to find a job. Don’t abuse it though, you only have 3 years with it and may need it badly at some point.
Default- bad. Not game over, but it definitely takes some serious work to get out from this. Keep in mind that 90% of loans will follow you, not even bankruptcy can erase them. You will not be able to buy a car, a house or get a credit card without exorbitant interest rates. If you are signed up for monthly payments, it takes 270 days of not paying to go into default. Your job may be required to send 15% of your earnings directly to the government.
So don't sit around and wait for the collectors to come calling. Live with a budget, be responsible and conscientious, and make your payments!
Photo credit: Paul Marotta/Getty Images