Student loan debt is a big problem and only getting bigger. In fact, according to the website Student Loan Hero, Americans now owe almost $1.3 trillion in student loan debt. This is divided among 44 million borrowers. The class of 2016 graduated owing an average of $37,172 in student loan debts, which was an increase of 6% from the previous year.
If you graduated owing this kind of money – or even more – it can be a real financial burden. Do you have a Direct Subsidized or Direct Unsubsidized Loan or a Subsidized or Unsubsidized Federal Stafford Loan or a PLUS Loan? Then you were automatically put into the Standard Repayment Plan. This means you’ll have 10 years to repay the loan with fixed monthly payments.
But what can you do if this is too much of a burden?
What you don’t want to do
Are you having a really hard time making your student loan payments? You do have options but one of them shouldn’t be to default on your federal student loans.
The Wall Street Journal has reported that more than 40% of Americans that borrowed from the federal government’s major student-loan programs are not making their payments or are behind on more than the $200 billion they borrowed.
This means they are in default on their loans, which is something you absolutely don’t want to have happen.
If you do default on your federal student loans your entire balances will become due and payable as well as any interest you owe. You will automatically lose your rights to deferment, forbearance and repayment plans.
You will lose your eligibility for any new student loans and your account will be sent to a collection agency.
Your loan will be reported as delinquent to the credit bureaus, which will severely damage your credit rating and you may have your income tax refunds may be withheld. Your wages could be garnished and your debt will increase due to additional interest, late fees, collection fees, court costs, attorney’s fees and other costs associated with the collection process.
If you feel you’re getting into trouble with your student loan debts the important thing is to be proactive and not let them go into default.
For example, if you’re on the Standard Repayment Plan you could apply for one of the income-driven repayment plans. Two of the most popular of these are Revised Pay As You Earn (REPAYE) and Pay As You Earn (PAYE).
Pay As You Earn
If you choose this program your monthly payments will be based on your income and the size of your family when you first begin making payments. It caps your payments at 10% of your discretionary income.
To qualify for one of these loans you must be a new borrower effective October 1, 2007 and must have received a disbursement from your Direct Loan on or after October 1, 2011.
Revised Pay As You Earn
This repayment plan is also based on your income and family size and also caps your monthly payments at 10% of your discretionary income regardless of when you first got your loans. It’s better than Pay As You Earn because you could qualify regardless of your income level and debt.
To get more details about the PAYE and REPAYE plans, click here and be sure to watch the following video.
Consolidating your debts with a new federal loan
There are also federal Direct Consolidation Loans. They represent a way to simplify things by consolidating all of your existing student loans into a new one. If you choose this option, you would then have just one monthly payment to make and it should be lower than the average of the payments you’re currently making as you can take as long as 30 years to repay the loan.
Just about all types of federal student loans can be consolidated with the exception of PLUS loans made to the parents of a dependent child. However, according to the Federal Student Aid website you must have at least one Direct Loan or FFEL Program loan that is in a grace period or in repayment.
The way the interest on a Direct Consolidation Loan is calculated is by weighting the average of the interest rates on the loans being consolidated and then rounding this up to the nearest one-eighth of 1%.
Consolidating with a private loan
Before applying for a federal Direct Consolidation Loan, it’s important to do the math.
The interest rates on private debt consolidation loans have fallen to almost all-time lows. This means a private debt consolidation loan could be a better option than a federal Consolidation Loan.
As an example of this, Citizens Bank is currently offering variable rate debt consolidation loans with interest rates as low as 2.37% APR (with autopay) or fixed interest loans with interest rates as low as 4.74% APR (with autopay). These loans are very flexible as they offer repayment plans of 10, 15, 20 and 30 years.
Other online sources for these types of loans include SoFi, LendKey, College Avenue and CommonBond.
The interest rate on any private consolidation loan will depend almost entirely on your credit score.
Lenders often look at credit scores in ranges. An “Excellent” credit score is one that ranges between 781 and 850 while a “Good” score is one between 661 and 780. A score ranging between 661 and 601 is considered to be a “Fair” score while anything below 601 is either “Poor” or “Bad”.
It’s easy now
Getting your credit score used to be difficult and costly. But today this is no longer the case. Several of the credit card issuers are now providing their cardholders with their credit scores free in their monthly statements.
If you’re not a cardholder of one of these companies you can still get your score free at sites such as CreditKarma, CreditSesame and MyFICO.com.
The advantages of a debt consolidation loan
There are several reasons why a private debt consolidation loan could be a better choice than a federal Direct Consolidation Loan.
The first of these is that a private loan offers more flexibility in terms of repayment plans. One of these loans may also have a better interest rate than a Direct Consolidation Loan.
Add these two together and this means you should be able to customize a private debt consolidation loan to fit your financial circumstances like a well-tailored glove.