The following is a guest post.
A recent Bloomberg article states, “Student Debt Could Be Next ‘Bomb,’ according to U.S. Bankruptcy Lawyers.” Yikes, that is a scary proposition but one that is a reality for millions of students who have completed their higher education and have hefty loans to pay back. The article goes on to say, “Federal and private student-loan debt is approaching $1 trillion and surpassed credit-card debt for the first time in 2010, according to Mark Kantrowitz, publisher of FinAid.org, a college grant and loan website. The borrowing represents a threat reminiscent of the mortgage crisis, the attorneys group said in a statement. Under U.S. law, student-loan debt — unlike credit-card borrowings — can rarely be discharged in bankruptcy court.”
Since student loan debt can rarely be discharged in bankruptcy that leaves students with several options for paying back their debt incurred in hopes of making a better life for themselves. I believe the problem stems from lack of education when it comes to student loans and what families are getting themselves into.
Do You Know Your Loans?
There are two types of student loans — government and private. Before you can start evaluating your repayment options, you need to determine which kind you have. If you’re not sure, check the paperwork:
- Government loans. A Stafford Loan, Perkins Loan, Federal Direct Loan Program, or the Federal Family Education Loan Program. With these types of loans you may be able to benefit from one of the governments repayment options.
- Private loans. These would be any type of loan not listed above. The bad news, you are bound to whatever terms you agreed upon when you took the loan out. FinAid is an excellent resource when it comes to private loans whether you are looking to take them out or seeking help with paying them back.
You May Have Options
If you have government loans, you are eligible for two standard repayment plans.
- 10 Years. The 10-Year Plan is the default option. You make fixed payments each month for 10 years, and at the end of the term, your loan is paid off.
- 20 Years. You can also opt for a 20-Year Plan, which will stretch out your repayment period. This will lower your monthly payments, but it also will increase the amount of interest you’ll pay over the life of the loan.
Either option works, however debt freedom including student loans should be a goal that you aim to achieve as quickly as possible; making the 10 year plan you best option.
Consolidate When Possible
There are several things to consider when deciding whether or not to use loan consolidation for your student loans. I am frequently asked why federal and private loans can’t be consolidated together. The best answer I can give is that they aren’t even in the same universe.
Private student loans are difficult to do anything with and should be developed into a plan to pay them back as quickly as possible due to the high interest rates they come with. If that means extending your federal loans in order to make larger payments, than so be it as these loans are ultimately hurting your bottom line.
Federal student loans afford you with more options when it comes to consolidating. In many cases you are borrowing from several sources and consolidating not only cuts down on the paperwork but also gives you one convenient monthly payment. Your best bet is to consolidate federal loans into the federal direct loan program.
Make a plan to Ditch Student Loan Debt
Now you know what type of loans you have, and whether or not you can consolidate them; it’s time to devise a plan to ditch them!
As I mentioned earlier the private loans with the higher interest rate price tag are the killer. Your goal: to pay them off as quickly as you possibly can.
Here are a few tips to help you get a jumpstart:
- Live beneath your means. I know this is not fun and certainly seems unfair after all of the hard work you put into your education. But, the key to ditching those student loans is to stay focused and be willing to make some sacrifices. For instance, consider a less expensive apartment, roommates, or shudder…living with your parents. A less expensive car or other commuting options such as public transit, biking, or ride shares may help you to cut transportation costs.
- Make student loans a priority. Prioritize your student loans over other debt with the exception of any credit card debt toting a high interest rate. Credit card debt may also be placed into debt consolidation to alleviate some of the burden.
- Go automated. The best way to prevent missing a payment and a subsequent penalty is to establish automatic payments for each of your creditors, especially your private student loan providers. Check with your student loan lender to find out if there are discounts for electing to have automatic payment deductions. Many lenders give a rate discount of around 0.25% for automated payments after a certain period of time. That will certainly help your bottom line!
- Pay extra. This goes without saying; even if it’s only an extra $50 or $100 a month you can make a huge dent in that student loan debt.
Paying back student loans can be a challenge. As you can see from the above referenced Bloomberg article student loan debt is becoming more prevalent than other forms of debt and bankruptcy is not an option when it comes to getting rid of student loans. Know your loans, consolidate when you can and devise a plan to pay them off as quickly as possible.
How did you “deal” when it came time to handle your student loans?
Jeffrey’s note: I’m defintely concerned about the amount of student debt we have in the U.S. now, and I’m afraid we could get a bubble effect like the housing bubble produced. It’s hard to tell what’s going to happen, but only time will tell.
This guest post by: Suzanne Cramer
Suzanne is a certified credit counselor and a Social Media Specialist for CareOne Debt Relief Services. Suzanne writes for Divorce, Debt and Finances and A Straight Talk on Debt. Follow Suzanne on Twitter @SuzanneCramer1 and @AskCareOne where she shares her insights on divorce and managing your finances.
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photo by: Jay Tamboli