Tuesday, October 27, 2015

Student Loan Debt: Student Loan Repayment Options

As most of us are aware, since the recession of 2007-2009, the economy continues to struggle with job growth and wage stagnation. Are you one of the many Americans making student loan payments that far exceed your income? Or are you chronically avoiding your payment options and either in danger of defaulting or have already defaulted?

According to a recent article in the Chicago Tribune “About half of people (in the US) making student loan payments would qualify to pay less, but only 13 percent are knowledgeable enough to set up payments that would be less overwhelming. This and other studies criticize the Department of Education for “hiding the escape routes from people struggling with student loan debt”.

By the Numbers:
  •  “About 41 million Americans have student loans, and some economists believe that the massive debt burdens are keeping individuals from starting families, buying homes, or spending more freely on items they might need or want.”.
  • As of September 2014, One in Seven student loan borrowers — or about 14 percent of student loan volume was in default within the first three years after college. 
  • In 2014, about $103 billion of the more than $1 trillion of federal student loans were in default, something that is easily avoided! (http://www.gao.gov/assets/670/661591.pdf)

Your Options

First, we must be clear that it is a borrowers responsibility to repay their student loans. Student loan debt includes undergraduate & graduate Stafford Loans; subsidized & unsubsidized. The Perkins loan program is managed directly by participating schools and helps lower income students with the cost of their education by offering a lower interest rate (https://studentaid.ed.gov/sa/types/loans/perkins). Regardless of the type of loans borrowed, all loans must be paid back or one risks defaulting, which will ruin your credit and generally narrow employ-ability options. 

1. Student Loan Deferments: https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance
  • Deferments: There are many types of deferments, but basically a deferment is a period during which repayment of the principal balance of your loan is temporarily delayed. You may defer interest as well, but be aware that interest will continue to accrue and added on to the principal balance of your loan.
  • Forbearance:  If you can't make your scheduled loan payments, but don't qualify for a deferment; your loan servicer may be able to grant you a forbearance. With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Again, interest will accrue on your loans

2. Loan Consolidation:

  • Each year, loans are sold to servicers and most borrowers end up with more than one servicer once they reach graduation. Consolidation helps move all your loans with one servicer, which makes it easier for borrowers to keep track of them.
  • Choose your servicer wisely by checking with the U.S. DOE Website.
  • If you will be attending graduate school, it is generally recommended to wait until one is completely done with their education before consolidating loans; but check with your servicer for clarification.

3. Income Sensitive Repayment Plans: http://www.finaid.org/loans/isr.phtml
  • All borrowers in repayment may apply for and if qualified, participate in this repayment plan, which can significantly reduce your monthly loan payments. The monthly loan payment is pegged to a fixed percentage of gross monthly income, anywhere between 4% and 25%. While the borrower determines the interest rate, the resulting monthly payment must be greater than or equal to the interest that accrues. Some lenders set a minimum threshold on the percentage of income based on your debt-to-income ratio.

4. Student Loan Forgiveness:

  • Students that choose to work in the Non-Profit Sector or Public Service may be eligible for loan forgiveness, generally after 10 years. 
  • During this time, loan payments are required, but borrowers may be eligible for Income Sensitive Repayment. 

5. Where to begin:

  • This website contains most of the information one needs to avoid repayment pitfalls, by reducing or deferring payments. 

About the Author:
Vicki Ancell is a coach, trainer, & author and owner of Pathway Coaching. She has over 25 years experience working in higher education, helping employees & employers align career & corporate goals with the right education solution. At Pathway Coaching, Vicki continues her work with individuals & organizations by bringing her knowledge, experience, & creativity to the coaching process.

  1. Student Loan Borrowers Have Options http://www.chicagotribune.com/business/yourmoney/ct-marksjarvis-0927-biz-20150925-column.html
  2. The NY Times: Why Student Debtors Go Unrescued http://www.nytimes.com/2015/10/07/opinion/why-student-debtors-go-unrescued.html?_r=0
  3. The Government Accountability Office Report on Student Loan Default & Oversighthttp://www.gao.gov/assets/680/672136.pdf
  4.  Student Borrowers are Missing out on the Best Repayment Plans:http://www.usnews.com/news/articles/2015/09/18/student-loan-borrowers-not-taking-advantage-of-best-repayment-plan-gao-says