It is frightening to see the statistics. According to a recent report issued by the Consumer Financial Protection Bureau, the size of the U.S. student loan market is over $1 trillion and there are approximately 7 million borrowers that are in default with their payments.
Student loans are unique in that they’re one of the few debts that can not be discharged with bankruptcy. The only reliable way to get out of your student loans is to pay them off.
In some situations, un-employment or under employment are at the heart of the default. However, I have seen people aggravate the problem by not proactively managing their loans or by completely ignoring the situation until it became intolerable. This dramatically impacts their credit score and makes the process of obtaining future credit for a home, cars – even insurance and employment – more difficult and expensive than if the loan repayments had been managed properly from the beginning.
A slip can haunt you for a long time. To get and keep you on the right repayment path, here are my top 5 recommendations for effectively managing your student loans:
1. Know your student loan situation
Student loans and the paper work you receive can be confusing. You’re likely to have more than one loan and those loans were probably made by different financial organizations. The company now servicing the loan might be completely different from the one that provided the loan. But ignoring the situation will not make it any easier.
As a starting point, for each loan, you need to know how much you owe, what is the interest rate, to whom do you owe the money, when do payments start or when are they due, and the payback term currently scheduled. Even if you think you know all of your loans, you want to make sure there is no erroneous loan information or amounts connected to you that you are not aware of. A great central source of information to find this info is the National Student Loan Data System www.nslds.ed.gov. This resource may provide all the important dates and other information about your loans, including the services. Your school should also have the information you require.
Be aware that private student loans are not covered in the NSL data system. In this case, your credit report can be a good way of tracking down the information regarding your private loans. Even if you think you have all of your loan information, I still recommend that you obtain your credit report from annualcreditreport.com. You might also want to monitor your credit activity through a service like CreditKarma.com. You can learn more about why you should periodically request your credit report in this previous post.
2. Get updated and organized
Ensure your contact information is current and correct. For example, the address listed when you took out the loans may have changed or may belong to your parents. Update all of your contact information, including your email address and phone number.
Most repayment systems will provide you with online access to manage your account(s). Keep track of your credentials. You want to know when there is an issue with your account.
Create a spreadsheet to track your loan info and set up paper files to maintain records of all notices and correspondence.
3. Plan a repayment strategy
Your repayment options depend on whether your loans are federal or private. Federal loans have flexible repayment options. You can extend your payments out as far as 25 years and you may be able to consolidate your loans. There are graduated plans with lower payments now and higher payments later on. Payments can even be a function of your income, such as the income based repayment program.
With private loans, repayment terms will vary depending on who made the loan to you. Be sure to contact them to see what options are available.
4. Consider automatic payments
Create a goal of making all of your payments on time. A great way to do this is to automate your payments.
Federal loan interest rates are reduced by 0.25% if you have your payments automatically taken out of your bank account. Similar deals are usually available with private loans.
Make sure you maintain an adequate bank account balance and if you plan to switch banks, update the payment source with the loan company.
5. Stay focused
Debt is like a slow leak that keeps draining money away from you. If you have extra money or income that you would like to use to pay down the loans faster, that’s a great way to get ahead. A word of caution, though, before trying to accelerate your loan payoff, make sure you are not placing yourself at risk. What if you lost your job or had a medical emergency. Do you have enough in savings to cover your expenses for 3 to 6 months of core living expenses? If not, start to build up your reserves. Once your reserves are adequately funded, apply the money you were saving to debt payments.
Do you have other debt that carries a higher interest rate than your student loans? If so, it would be wise to put any extra funds towards the higher interest rate debt before the student loans. But if your student loans are your only debt and you have a well funded emergency reserve, go ahead and apply extra money toward the principal of your student loans. If your student loans have different interest rates, apply those extra payments to principal on the loans with the highest rates in priority order.
The interest rates on student loans are relatively low when compared to other types of unsecured debt but the payback period is long. The interest adds up over time, but for some, the interest can be written off on their taxes. Run the numbers and understand the total cost of the debt to you.
Dealing with student debt is a big responsibility. It might even be a newly graduated student’s first significant financial undertaking. While making loan payments is never fun, it’s an agreement you made and need to honor. Get on top of the situation now, and the future will be much brighter.
Do you have suggestions or ways you have dealt with student loans? Share your comments below.
