Another school year, come and gone. As you may have read, my sister graduated from Southern Illinois University with a PhD in Anthropology this semester. She’s pretty amazing! My brother in law Ryan should be receiving his PhD (also in Anthropology) in December of this year as well. We are all so proud of them both! ♥
After years and years of college and graduate school, suffice it to say that my sister knows a thing or two about student loans.
This spring, as high school graduates prepare to take their newly acquired diplomas and run off to college, and as recent college graduates brace themselves to repay student loans, it is more important than ever to arm yourself with as much student loan information as possible.
Student Loans: Options, Payback, Consolidation and How They are Strangling the Prosperity Out of a Generation
If you’re not careful, you could be paying on your student loans for decades – or perhaps even until you retire from that job you worked so hard to secure with that degree. Or, as shown in this simple Google search, until death do you part.
Guest post by my sister, Meadow:
If you are a new or recent college graduate – CONGRATS! You have a few letters after your name on that spiffy new resume and it feels pretty good, doesn’t it?!
Ride that high for as long as you can because if you’re like nearly 40 million1 other Americans, you now have student loan debt to repay. BLEH! Collectively we owe $1.2 trillion1 dollars (yes, that is a T for trillion) and average $33,000 in student loan debt1.
I could rant for days about student loans. From the ever-increasing cost of college tuition and fees that makes loans so burdensome in the end, to the bloat of administration as many colleges begin to treat students as customers and their tuition dollars as a given (thanks to ready-available student loans), to the interest rates on loans that went to pay for an education – not a house, car, vacation, etc, yeah…I could rant for days.
The fact is that college is now much more expensive than it was for older individuals “back in the day” yet still offers one path towards bettering yourself and your community through obtaining an education.
But this post is supposed to be helpful! And I’m trying to keep my ranting to a minimum. Still, feel free to leave your own ranting below because you are definitely not alone.
First, some basics on taking out student loans…
(If you’re already wearing the yoke of student loans, skip below to read about making a game plan to repay them).
Student loans can be obtained through either a private lending institution or the federal government. Federal loans are the way to go for several reasons2. Take a deep breath because the cons to using private lenders is lengthy…
Private Student Loans
Private lenders almost always have higher and usually variable interest rates (upwards of 18%!), nearly always require payments to be made while you are still in school2, are not subsidized by taxpayers, are dependent upon your credit rating and history, are unlikely to include interest that could be deducted from your annual tax bill, cannot be consolidated with other (federal) loans, are unlikely to offer deferment, forbearance, or other payment options, usually come with a prepayment penalty (a nice thank you from your lender for paying off your loan!), and do not offer forgiveness programs. Whew! Let’s review the options for federal student loans.
Federal Student Loans
Federal loans are funded and backed by the US government. They offer several advantages to private lenders.
First, you will not need to make payments while in school so long as you are enrolled more than half-time status. If you graduate or leave school (even without graduating) you will begin making payments six months after doing so.
Second, federal loan interest rates are usually fixed and are oftentimes lower than what you’d be offered at a private lender. Congress sets the interest rates on student loans and it can vary somewhat from year to year. To see what they are as of July 1, 2015, click here.
The interest rate for loans taken out in any given year will stay the same for the length of that loan. Future loans will be subject to the whims of Congress ( 🙂 ). Why I pay more in interest rates for my student loans than I do on my house and car is beyond me! But, I digress…
Federal loans are issued based on financial need – calculated as the cost of attendance based on where you go to school and your expected family contribution which is based on your adjusted gross income given on your annual taxes. To qualify for federal student loans you will not need a credit check (except for one type of federal loan for graduate students, the PLUS loan) and you will likely not need a cosigner. The loans are a good way to build a positive credit history – the liquid gold of proper adulting! Additionally, interest on your student loans may be tax deductible.
Federal loans can be consolidated which may lower your interest rates and will allow you to make one payment instead of multiple individual payments. If you pay the thing off early (good for you!) there is no prepayment penalty fee.
Lastly, depending on where you land with that fancy new job offered you because of these loans, you may qualify for loan forgiveness. For example, most public service jobs are eligible for forgiveness. Begin the federal student loan process by completing the FASFA (Free Application for Federal Student Aid) here. For a nice infographic on the FASFA process, click here.
Okay! You have student loans and it is time to repay them. By now your loan service provider will have contacted you to arrange payments. Big services include Navient, FedLoan Servicing, CornerStone, and a few others. Don’t worry, though, you don’t get to pick your loan service provider – the US Department of Education will assign you.
First things first – consolidate all eligible loans. Consolidation gives you one or very few payments versus making individual payments on each loan you were given.
Next, find out how much they want each month – and make sure you are sitting down because it’s likely to bowl you over!
Call them and find out what kind of payment plans you qualify for, and try to get on a version of Income Based Repayment plan (IBR). Most (but not all) federal loans will qualify for IBR. Regardless of how much total debt you own, under an IBR the size of your payment will depend on your income, family size, and residence.
Typical repayment rates are 15% of your discretionary income. If that great new job earns you $4,000 a month you can expect to pay around $600. Click here to use the US Department of Education’s repayment estimator for a more accurate estimate of your monthly payments.
Unless you enter into some sort of forgiveness plan because your job is in the public sector at a qualifying institution, expect to be on an IBR for 20-25 years (GULP!) unless the loans are paid off sooner. (We can have the discussion about saving for retirement at a later date, haha!).
Under an IBR you will need to re-certify your income and family size each year and your payments will change based on that information. Figure out how to lower your adjusted gross income to avoid large increases!
Obviously, because you are paying less per month towards your total loan debt, you will pay more interest over time on loans that continue to accrue interest. Still, the benefits of an IBR are clear for most borrowers. To get started on an IBR, click here.
Even if an IBR isn’t right for you, or you don’t qualify for one, make sure to stay in regular contact with your loan service provider to arrange payments.
Student Loan Freedom
Avoidance won’t make these loans go away, and as we all know, they cannot be discharged in bankruptcy filings so there is no getting out of them. Stay on top of them, stay connected with your provider, find ways to reduce your payments if you can, find an eligible job in the public sector to forgive the loans faster, and keep chugging along toward debt freedom. 🙂
Interest rates: https://studentaid.ed.gov/sa/types/loans/interest-rates#rates
PLUS loans for graduate students: https://studentaid.ed.gov/sa/types/loans/plus
Public service jobs: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation
Infographic on FAFSA: https://www.debt.org/students/playing-the-financial-aid-game-infographic/
Sallie Mae: https://www.salliemae.com/
FedLoan Servicing: http://www.myfedloan.org/
IBR info: https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven
Repayment estimator: https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action
Loans qualifying for IBR: https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven#eligible-loans
IBR application: https://studentloans.gov/myDirectLoan/redirect.action?app=idr&from=15SPRRPMT&id=500#