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Forbearance, Deferment and Income-Based Repayment Programs for Student Loans

Today, approximately 70% of college graduates leave institutions of higher learning with significant amounts of student loan debts; over 44 million Americans collectively owe almost $1.5 trillion – that averages out to 1 in 4 American adults with student loan debts, with each having over $35,000 to pay off. With these record rates of exorbitant student loan debts, it is no surprise that many professionals – especially the younger, less experienced ones – are having a tough time keeping up with the payment plans to which they previously agreed.

When someone is struggling terribly to pay off their staggering student debts, they have a few logical courses of action to ease, if temporarily, this financial stress. The most common, and perhaps most treacherous, is called forbearance. This arrangement is quick and easy to set up, often requiring only one phone call to alter the status of your student loans to this state. But beware: while opting for a period forbearance will halt the barrage of monthly student loan payments for up to a year, these loans keep accruing interest at the regular rates. After the forbearance period ends, those compiled interest charges can hike monthly payments – making it more difficult than before to pay monthly student loan bills, especially if your overall financial situation has not improved during the forbearance period.

Another payment option, which has most of the benefits of forbearance, but less of its pitfalls, is deferment. Unsurprisingly, deferment is more difficult to set up than forbearance; you have to apply and qualify for this status, and eligibility is dependent on filing the necessary paperwork with a loan officer and reasonable need, including unemployment or continued enrollment in school at least half time. During a period of deferment (which is also more variable in duration than forbearance) subsidized federal student loans and Perkins loans do not accrue interest. Furthermore, if qualified for deferment, you retain the option to opt for forbearance at a later date if the need for further financial relief arises later.

An additional payment plan is the income-based Revised-Pay-As-You-Earn plan (REPAYE), which does not have any income requirements and can be accessed by those with very low or no income. In this plan, eligible borrowers will generally pay bills equaling ten-percent of their discretionary income (with a required recertification of income and family size every year), and, after twenty or twenty-five years of payments, the remaining student loan balance is forgiven. If – due to low income or abnormally high amounts of student loan debts – borrowers’ payments are not large enough to cover their interest costs, all or part of the interest accrued in this payment period will be paid for by the government.

Before defaulting on student loans, consider taking advantage of one or all of these repayment options.


If I Could Turn Back Time (on My Student Loans)

Today is Daylight Savings Time and despite your feelings on the matter, most of us turn our clocks back one hour.

The concept of turning back time has always fascinated people in modern times. It was popularized by H. G. Wells in 1895 with his novel The Time Machine and came to full-scale popularity in the current age with the likes of Back to the Future, The Terminator and yes, even in Cher’s 1989 hit “If I Could Turn Back Time.”

The reason why these stories are so entertaining to us as a society pertains to one thing – a sense of if you knew what you know now back then, you’d be better off.

We all have had those thoughts. If I only knew the lottery numbers. If I only found Jeff Bezos in 1997 and invested $5,000. If I could go back and stop Hitler (I understand why this is so popular, but I don’t know how people intend to do that when almost the entire world at the time was on the same page with you). If I could take back what I said to a loved one. I could keep going, but I think you understand the point.

The funny thing is that your college experience was probably not that different. I wish I hadn’t said this to that person. I wish I wouldn’t have worn that on Halloween. I wish I picked a different major. I wish I wouldn’t have taken a class called “Walk/Jog” and instead took Computer Programming. I wish, I wish, I wish.

Student loans are much like that too. I wish I would’ve started with the lowest introductory rate. I wish I would’ve consolidated as I went along. I wish I had someone to co-sign for my loans to bring the interest rate down. I wish I had someone that paid for my loans. I wish I went back in time and hit the lottery so I could pay this all off at once….

Statistics tell us that you most likely didn’t win the lottery and that you most likely still hold student loans. There are $1.5 Trillion in student loans with 44 million students carrying an average of $34,090 in student loan debt. Basically, there is a good chance you had, do have or will have student loan debt.

It’s easy to think about how to turn back time and change your current situation, but it’s hard to think about how to actually make that change. The truth is that it is fairly easy, you just need to get started and know where to start. Admitting that you have a problem is half of the battle.

After you are able to admit that you could be in a better place on your student loans, it’s important to take these next steps:
  1. Assess your situation – get your entire snapshot of where you currently stand
  2. Create a budget – create a budget with paying beyond the minimum for student loans as a bill
  3. Set a goal – we all falter here and life gets in the way, so it’s important to adjust as you go along
  4. Restructure & Refinance – there are many small tricks that can save you thousands of dollars in interest by the structure of your loans
  5. Eliminate – eliminate your loans in some order (descending from the highest interest rate, closest to being paid off, etc.)

There are many more little details that go into student loans, but at its base, if you follow these steps, you’ll be on the right track to eliminating your student loans.

Just think about what your future self would tell yourself now.

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Student Loans: How Do They Work?

Ever wonder how student loans actually work? Most of us have them, but there’s more than meets the eye.

Secondary education has become increasingly important for young professionals and increasingly expensive over the last couple of decades. As a result, it has become imperative that students understand the student loan process which seemingly becomes more complicated with time.

In short, there are federal loans and private loans. Federal loans are provided by the US Department of Education through federal funding in the form of Direct Subsidized/Unsubsidized loans, Perkins loans, PLUS loans, or Consolidation loans. Students apply for these federal loans by filling out a FAFSA form for student aid application, which allows you access to scholarships, grants, work-study programs, and other financial assistance along with federal loans if needed. Federal student loans provide a fixed interest rate (varies based on the type and when it is granted) and depending on the type of loan you receive the government might pay interest that accrues until you graduate. All of these federal loans generally include a 6 month grace period to allow students to get on their feet after graduating before making loan payments.

If you have a federal government loan, there are various service providers that manage your loan account and act on behalf of the government to collect payments after graduation. With federal government loans, there are numerous repayment options based on an individual’s financial situation, but the standard plan defaults to a 10-year repayment plan in equal monthly installments. The federal government also has numerous options to forgive, cancel, forego or delay student loan payments based on a number of programs. For example, by enrolling in the Student Loan Forgiveness program as a ten-year employee of qualified, not for profit organizations, you can apply to have your loans completely forgiven. Additionally, the federal government usually reduces your interest rate by 0.25% by consolidating all your loans and setting up automatic payments through your service provider.

If you are unable to qualify for student loans or need additional funds that the government will not provide, additional private loans are your only option through a private loan application (but should be used as a last resort). A number of private companies and banks provide loans to students similar to a car loan or mortgage. In general, these loans have higher interest rates compared to federal loans and they can have either fixed or variable interest rates. It is generally a good idea to try and get a cosigner (backer of your loan) for these types of loans in order to reduce your interest rates. Usually, these loans are higher interest and can be variable with lesser terms compared to federal government loans, as private companies see college students with no income as highly risky borrowers. Additionally, private loans rarely have flexible repayment options, forgiveness options, grace periods, or interest rate payment forgiveness.

Understanding the student loan process is the first step in saying BYE to your student loan problems and hello to your financial freedom!