Heres What You Need To Know About Your Student Loans Before Its Too Late
No one told Jessica Jacho in high school what she needed to know about student loans how much to take out, what types to take out or how to apply for it.
Jacho, a junior at Monmouth University in West Long Branch, New Jersey, has roughly $60,000 of debt with several years of school ahead of her.
As a first-generation college student, she has two more years to complete her degree and plans to spend three more years in veterinary school, which can potentially push her student loan debt over $100,000.
“When I was in high school, I actually didn’t quite know a lot about student loans, and I didn’t really know much about financial aid,” Jacho said.
Jacho is not alone in how much student loan debt she’s accumulated.
By the end of 2021, the Federal Reserve reported the total amount of student loan debt in the U.S. reached nearly $1.75 trillion, which has grown more than 80% in the last decade.
It will also take the average borrower 20 years to pay back their student loans, according to the Education Data Initiative. The study shows graduates in 2022 are projected to take 10 years to pay back roughly $45,000 of debt if they make monthly payments of $345.
But the cautionary tale is the more you owe, the longer it will take to pay off.
As national student loan debt skyrockets, here are tips from experts on everything you should know about your student loans before and after you take on debt.
Financial Instability Was The Biggest Barrier To Repayment Among Off
Research indicates that the overall state of a familys finances informs how the household manages its individual bills and transactions, and off-track borrowers generally agreed that their repayment challenges were the result of budgets that were already stretched to the breaking point.18 In addition to earning less money than they anticipated, many off-track borrowers reported experiencing income volatility and financial shockssuch as unemployment, major home or auto repairs, medical expenses, or deaths in the familythat rippled through their finances and hindered their ability to pay on their loans. In addition, borrowers who lived in high-cost metropolitan areas, such as Miami and Seattle, said the cost of living contributed to the unaffordability of their student loan payments.
If your car breaks down, and it needs repair, are you going to get your car repaired, or are you going to do your student loan?
Weve had lots of medical issues that have come up with me and our little boy. You dont have a choice when that happens. You have to take care of business.
I had a couple of really bad events. We had Hurricane Irma. We lost the roof on our house.
I was working as a delivery driver to get $5 an hour plus whatever if you get tipped. … We live paycheck to paycheck.
The payments stopped because I didnt have work. … And so just trying to take care of myself in survival mode.
Ask Your Employer About Repayment Assistance
There are many employers that have begun offering student loan repayment assistance or tuition reimbursement. Some employers, including Starbucks and Walmart, even offer free college for workers who sign up for degree programs within a chosen network of courses and schools.
Employers can contribute up to $5,250 toward an employees college tuition or student loan repayment assistance through 2025 with favorable tax treatment. This benefit is not considered taxable income for the employee, which is a major boon for workers who are pursuing higher education while continuing to work.
Employers can deduct the expense on their end as well, paving the way toward a considerable tax benefit on both ends. Check your employee manual or speak with your HR department to see what kind of tuition assistance or loan repayment options are available at your company.
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Cons Of Paying Off Student Loans Early
- Could lose eligibility for loan forgiveness. If youre working toward loan forgiveness through an income-driven repayment plan or Public Service Loan Forgiveness, making extra payments or paying your loan in full will reduce the amount you will see forgiven.
- May miss out on stock market gains. Paying extra on your student loans instead of investing could cause you to miss out on gains. In some scenarios, you may be able to make more money through investing than what you would save in interest by paying off loans early. That said, investing does come with a lot of risk.
- Draws focus from other forms of debt. Paying off student loans early isnt worth it if you are dealing with other forms of high-interest debt. If you have a credit card balance with an interest rate of 16 percent, for instance, it makes more sense to put extra payments toward that account rather than toward a student loan with 5 percent interest.
Who You Need To Repay
You may have loans or lines of credit that you need to repay to the government and/or your financial institution.
In some provinces and territories, Canada Student Loans are issued separately by the federal and provincial or territorial governments. This means that you could have more than one loan to pay back.
Verify your contracts to determine where your debt comes from and where you need to repay it.
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When Do You Start Paying Off Student Loans
You must start repaying federal student loans six months after you graduate, unenroll, or drop below half-time enrollment. If you have private student loans, your repayment terms may be differentyou may even need to make payments while you’re in school. Check your loan agreement for more information.
Borrowers Consistently Faced Challenges Understanding Enrolling In And Remaining In Income
Borrowers have access to a range of repayment options, including income-driven plans, which calculate payments based on a borrowers income and family size and must be recertified annually. Research and government analysis show that income-driven plans can help struggling borrowers avoid delinquency and default. For example, studies in Iowa found that 35 percent of community college students enrolled in the Standard Repayment Plan defaulted compared with just 3 percent of those in income-driven plans.25 However, only about 30 percent of borrowers are currently enrolled in such plans nationwide.26
Focus group participants reported that income-driven plans were difficult to get into initially and to stay enrolled in because of the complex application and recertification processes. According to federal data, between 2013 and 2014, more than half of borrowers in income-driven plans did not recertify by the deadline, and nearly a third went into hardship-related forbearance or deferment.27 Such delayswhich could occur because paperwork is not submitted or processed accurately or on timecause monthly payments to increase and unpaid interest to capitalize.28
FUTURE Act Could Improve Access to Affordable Repayment Plans
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How Much Do I Pay Each Month Can I Pay More
Your minimum monthly payment is based on the type of loan, the amount you owe, the length of your repayment plan and your interest rate. Typically, borrowers have 10 to 25 years to repay federal loans entirely. Shorter lengths of repayment time or larger loans will result in higher monthly payments.
The Standard 10-year Repayment Plan is by far the most popular plan with borrowers, but that doesnt mean it is the best plan for you. This is the default plan. Borrowers are automatically enrolled in the Standard Repayment Plan unless they choose a different one.
Youll make fixed monthly payments for 10 years. Its a great plan if you can afford the monthly payments and the cheapest option long term because youll pay a lot less in interest. If you lack the income to support these payments, however, you should enroll in one of the income-driven repayment plans.
Or perhaps you have in mind applying for the Public Service Loan Forgiveness program. Work full-time in a qualifying field government at any level, or not-for-profit organizations that are tax-exempt under Section 501 of the Internal Revenue Code and make 120 qualifying monthly payments, and whatever balance remains will be forgiven.
Overborrowing: Just Say No
Believe it or not, lenders may offer you more money than you really need to pay for school. Yes, they’re increasing their risk of not getting paid back by allowing you to potentially overextend yourself. But they’re also increasing their potential profits by having you pay them more interest.
Student loans are so hard to discharge in bankruptcy and can be collected in so many ways that you should assume lenders don’t have your best interests at heart. That said, it’s your job to figure out the smallest amount you need to borrow to earn your degree.
“You always have the option to turn down additional loans or even reduce the amount for which you are approved,” says Josh Simpson, an investment advisor representative with Lake Advisory Group. The strategy of only borrowing what you need may seem obvious but it is often overlooked, he says.
How To Avoid Having Federal Student Loans Sent To Collections
The federal government will send student loans to collections after nine months of non-payment. If youve already missed a payment or youre worried about missing one in the future, here are some strategies to consider.
Change Your Repayment Plan
Borrowers with federal loans can switch to a less expensive repayment plan if theyre currently making payments under the standard repayment plan.
These options include income-driven repayment, in which payments will be determined based on your annual salary and family size. Depending on the type of loan you have, the remaining balance will be forgiven after either 20 or 25 years worth of payments. Borrowers will have to pay taxes on the amount forgiven.
You also can use an extended or graduated repayment plan if you want a lower monthly payment. These plans do not include any loan forgiveness, however. You can use the Federal Student Aid Loan Simulator to see how your payment may change.
Crowdfund Your College Tuition
If you dont have the savings but a huge network of friends, then you may be able to crowdfund your education. There are even crowdfunding sites dedicated to covering college costs. Since crowdfunding donations are essentially a gift, you wont have to pay back the costs and may not have to worry about taxes.
On the other hand, if your campaign isnt successful, you wont be able to keep any of the money donated. While the campaign is free to launch, it will require a significant amount of your time to promote it.
Make sure you have a few donors willing to contribute and share right off the bat to increase your chances of success. Its also a good idea to keep your goal small. You can always raise it later, but you dont want to fall short and lose your contributions.
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Is It Smart To Pay Off Student Loans Early
Whether or not you should pay off student loans early depends on your situation. If you can afford to pay more than the minimum payment and knock out your student loans early without sacrificing other financial goals, you probably should.
Then again, the fact that student loans come with low fixed interest rates and fixed monthly payments means that you may not be in a hurry to pay them off. If you have other high-interest debt like credit cards or personal loans, you should focus on those first to avoid paying more than you have to.
Whatever you decide, its crucial to know what you may be gaining and what you may be giving up. Here are some of the benefits and downsides to repaying your student loans ahead of schedule.
What About Deferment Or Forbearance
If you can’t afford to make your monthly student loan payments, a last resort is to seek loan deferment or forbearance. While both methods can help, generally they are temporary and come with several financial factors to consider, such as accruing interest. If homeownership is your goal, this option could interfere with qualifying for a mortgage because your student loan payments may get larger once you resume paying.
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Subsidized Loans Dont Accrue Interest During In
Subsidized student loans are federal student loans that dont charge interest while you are in college, in deferment or other specific circumstances. For instance, you wont pay interest on your subsidized student loans when you are enrolled at least half-time as a graduate student. Thus, its probably better to redirect the money toward your living expenses, credit card debt or graduate school costs.
What About Student Loan Refinancing And Consolidation
Student loan refinancing and consolidation lets borrowers consolidate their loans into one easier-to-manage loan with a single monthly payment. When you consolidate loans through a private lender, it’s called refinancing. The benefits include lower interest rates and possibly lower payments.
There are drawbacks to refinancing, however. For example, if you refinance your federal loans with a private lender, you’ll lose the protection and flexibility many federal loans offer.
You can consolidate most federal loans by completing the Federal Direct Consolidation Loan Application. This approach provides a single monthly payment with a fixed interest rate based on the average rate of all consolidated loans.
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Keep Your Debt Below Your Expected Post
Westergard recommends that people view student loans as an investment and never take on more debt than theyll earn with an entry-level salary in their chosen career field.
Going to school doesnt guarantee a great job or a great salary anymore, Westergard said. You need to do your due diligence to be sure that the investment in your degree is actually worth the amount of money you will be earning after school.
Reasons Not To Pay Off Student Loans Early
Getting out of debt fast sounds great, but it’s not always doable for everyone. Before you jump into a plan to decimate your student loan balance, take stock of your whole financial situation.
- If you don’t have enough saved up: A healthy emergency fund can help you avoid going into debt when life gives you an expensive surprise. Prioritize building a savings reserve of three to six months’ worth of your crucial expenses before aggressively paying down student loan debt.
- If you have other debt: Student loans have relatively low interest rates, compared with other forms of credit like personal loans and credit cards. Be sure to compare interest rates when deciding what debt to tackle firststudent loans probably won’t be the first thing you want to get rid of if your main goal is to save money by getting out of debt.
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Refinance If You Have Good Credit And A Steady Job
Refinancing student loans can help you pay off student loans fast without making extra payments.
Refinancing replaces multiple student loans with a single private loan, ideally at a lower interest rate. To speed up repayment, choose a new loan term thats less than what’s left on your current loans.
Opting for a shorter term may increase your monthly payment. But it will help you pay the debt faster and save money on interest.
For example, refinancing $50,000 from 8.5% interest to 4.5% could let you pay off your student loan debt nearly two years faster. It would also save you about $13,000 in interest, even with payments that stay about the same.
Youre a good candidate for refinancing if you have a credit score in at least the high 600s, a solid income and a debt-to-income ratio below 50%. You shouldn’t refinance federal student loans if you want or need programs like income-driven repayment and Public Service Loan Forgiveness.
How Long Should It Take To Pay Off Student Loans
It typically takes between 10 and 30 years to pay off a student loan balance, but the time frame depends on your loansinterest rates, your total balance owed, your annual income and your repayment plan.
Income-driven repayment plans are also available these let you pay a percentage of your discretionary income for 20 to 25 years before ultimately forgiving your remaining balances. If you have private student loans, on the other hand, you can usually select a repayment timeline that works for you, ranging from five years all the way up to 20 years. If you need more time, you can always choose to refinance your private loans.
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Get A Game Plan For How To Pay Off Student Loans
These students took different approaches to paying off their loans: earning extra money and aggressive budgeting.
As soon as he started to earn a paycheck from his on-campus job, Patrick began making monthly payments on his first loan. I knew I wanted to make a payment of about $200 per month, so that kept me motivated to work, he said. He started to pick up more gigs: a job on campus, two different jobs waiting tables, an internship with a commercial real estate firm, and a position as a translator for a film company.
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Make Extra Payments The Right Way
Theres never any penalty for paying student loans early or paying more than the minimum. But there is a caveat with prepayment: Student loan servicers, which collect your bill, may apply the extra amount to the next months payment.
That advances your due date, but it wont help you pay off student loans faster. Instead, instruct your servicer either online, by phone or by mail to apply overpayments to your current balance, and to keep next months due date as planned.
You can make an additional payment at any point in the month, or you can make a lump-sum student loan payment on the due date. Either can save you a lot of money.
For example, lets say you owe $10,000 with a 4.5% interest rate. By paying an extra $100 every month, youd be debt-free more than five years ahead of schedule, if you were on a 10-year repayment plan.
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