All Posts in Category: Student Loans
Today, those that graduate college with student loans owe, on average, close to $30,000 and, over the coming years, they’ll likely repay more than that amount because of the rising rates of interest (the interest rate of the 2019-20 undergraduate class was 4.53%). The growing crisis surrounding the student loan system – the increasing rates of unpaid student debts and defaults on these loans – is likely due in no small part to the general confusion around the various repayment plans offered in the federal loan system, and the somewhat convoluted terms and nuanced differences between these repayment options. An analysis based on the interest rate of the most recent undergraduate class and that 30k average debt at graduation brings to light the details of the differences between the federal repayment plans, and provides more clarity about which plan would be best for you.
The Standard Repayment Plan is the plan that all borrowers of federal student loans automatically start under, unless and until they opt to change to another repayment plan. A borrower with thirty-thousand dollars of student loan debt (with a 4.53% interest rate) would pay a monthly bill of $311 for 120 months (ten years) before their student loan balance was settled, and during that period they would pay a total of $37,311 after accounting for the added cost of the interest. Under the parameters of this plan, given the conditions of the example, more than seven thousand dollars would be added to the total of the loan.
The next repayment plan offered by the federal student loan system is the Graduated Repayment Plan, in which monthly payments start low and then increase every two years until the full balance of the loan is settled. Taking the same input example of financial conditions, the Graduated repayment plan costs $39,161 – $1,850 more than the Standard plan due to additional interest costs, although the duration of the repayment periods are both 10-years. The Graduated Repayment Plan is a good option for those borrowers who expect their earnings to increase in the future, but due to the added interest costs of this plan, experts suggest trying to make the standard repayment plan work, if possible.
The Extended Repayment Plan lasts for 25-years, more than double the typical 10-year duration. In this plan, a borrower’s payment scheme can be either fixed or graduated. Paying off a loan balance of thirty-thousand dollars with this plan adds more than twenty thousand dollars in interest to the total: monthly payments of $167 for 300 hundred months (plus the accrued-interest) means borrowers that opt for this plan will pay $50,027. To even be given access to the Extended Repayment option, a borrower must owe thirty-thousand or more in student loan debt. Due to the extensive duration of the repayment period, and the monstrous amount of interest added to the total bill of the loan, the Extended Repayment plan is not the best option for most people.
The final class of federal repayment options is the Income-based Repayment Plans, of which there are four. These plans base a borrower’s expected monthly payments on their discretionary income and the size of their family, and these factors are recertified and updated every year of the repayment period. Taking the same figures of student debt and interest rate, and assuming an income of $50,004 (and a 5% salary increase per year) with a family size of zero, a borrower will pay a total of $37,356 over a 110-month repayment-period. As you can see, under these specific circumstances the income-driven repayment plan costs about as much as the Standard plan. However, the income-driven repayment plans are typically used as a safeguard for borrowers that cannot afford their loans due to low income or astronomical loans, and in those conditions, monthly payments can be as little as zero. Furthermore, after twenty or twenty-five years of regular payments on the income-based repayment plan, the borrowers’ remaining balances are forgiven. Income-based repayment may reduce the monthly bills, but because you are paying off the student loans for a longer period of time, as in the Extended repayment plan, you will end up paying more in accrued-interest costs.
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Pay As You Earn Repayment Plan (PAYE Plan)
- Income-Based Repayment Plan (IBR Plan)
- Income-Contingent Repayment Plan (ICR Plan)
No matter the repayment plan you choose, there are some proactive ways to save money while repaying a student debt. One is to make payments during the grace period, the six-month window after graduation in which the federal government abstains from sending any bills to the borrower. Another method is to set up automatic payments to be taken directly from your bank account, which can cut down on the long-run costs of interest. If affordable, you can always pay twice in a month, chopping away at the length of the repayment period. Finally, it would be wise to purchase the book BYE Student Loan Debt by Daniel J. Mendelson in which you can learn more ways to effectively manage and eliminate student loan debt, empowering yourself in the process.
Check Out Our New Student Loan Calculator Tools Here
Learn More About How to Get Rid of Your Student Loans Here
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.
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:
- Assess your situation – get your entire snapshot of where you currently stand
- Create a budget – create a budget with paying beyond the minimum for student loans as a bill
- Set a goal – we all falter here and life gets in the way, so it’s important to adjust as you go along
- Restructure & Refinance – there are many small tricks that can save you thousands of dollars in interest by the structure of your loans
- 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.
Check Out Our New Student Loan Calculator Tools Here
Learn More About How to Get Rid of Your Student Loans Here
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!