Making Student Loan Payments Manageable
Earlier this week I wrote about borrowers struggling to repay student loans. Student loans offer more flexibility and repayment options than any other debt and credit obligations. There are many options available to borrowers looking to make their student loan payments more manageable. Here are a few.
- Talk to Your Lender: if you are struggling to repay your loans, speak to your lender before you stop making any payments. If you default before contacting your lender, they may play hardball and begin a court action to commence collection proceedings. If you are sued and lose, the lender can garnish your wages, put a lien on your property and take money from your bank accounts. Lenders hoping to avoid these situations may offer alternatives such as interest only repayment or stretching out repayment to make payments more affordable.
- Request Deferments or Forbearance: Lenders may agree to deferments or forbearance, which is where they allow you to make no payments for up to three years for federal loans (due to unemployment, economic hardship, attending school at least half time, serving on active duty in the military, etc) and up to one year for private loans. For example, while in forbearance, interest on subsidized federal loans does not have to be repaid but continues to accrue for unsubsidized loans. Because the interest continues to accrue on most loans in forbearance, this option should only be used for short-term periods of time.
- Consider Income-Based Repayment: A new option available last year for federal loans (which includes Stafford loans, Perkins loans and Grad Plus loans) is the income-based repayment plan, or IBR. Under this option, the loan payment can be as low as zero and is capped at 15% of discretionary income (defined as your income that exceeds 150% of the poverty line). Borrowers whose total debt exceeds their annual income are likely to qualify for this option. Under this option, any loan balance that remains after 25 years of payments is forgiven, but you'll owe tax on the forgiven amount. Check out the calculator at IBRinfo.org to see if you qualify for this option.
- Consolidation Loan: One way to make your student loan payments more manageable is through loan consolidation, which allows borrowers with qualifying student loans to combine all of their loans from various lenders into one single loan with a single lender. The main benefit of student loan consolidation is a smaller monthly payment, which is typically the result of stretching out payments over longer period of time (up to 30 years). Some consolidation loan providers also offer discounts for signing up for automatic payments and making payments on time. Before you shop around for a consolidation loan, you'll want to check to see if this will save on the interest rate. The rate for the consolidation loan is the weighted average of the variable rates on your existing loans, typically rounded up by the next eighth of a percentage point. Check out loanconsolidation.ed.gov for more information on the federal Direct Loan program.
