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Paying Off Student Loans

paying off student loans

Student loan debt has surpassed credit card debt in 2014. Student debt has now crossed the $1 Trillion mark and will probably continue to rise quickly unless the government understands its implications on the US economic growth and takes action to mitigate the problem. The graduating class of 2014 is the most indebted, with roughly 70% of the newly undergrad degree holders carrying an average debt of $33,000 each.

More than 7 million borrowers are in default on federal or private student loans right now. That number is shocking, and it’s only going to get worse because federal student loan interest rates will rise by 0.8% on July 1, 2014. So what are current students, recent grads, and not-so-recent grads supposed to do to help with the burden of student debt?

We’ll show you a few different ways to pay off your student loans:

Loan Consolidation

One solid and not so hard option is Loan Consolidation. A Direct Consolidation Loan allows you to consolidate (combine) multiple federal education loans into one loan. The result is a single monthly payment instead of multiple payments with multiple interest rates. There is no application fee to consolidate your federal student loans into one direct consolidation loan. Do not trust anyone telling you that they will consolidate your loans for a fee. It’s a scam because it means that you are not dealing with one of the U.S. Department of Education’s consolidation servicers.

Loan consolidation can simplify loan repayment by combining your loans into one bill and can lower monthly payments by giving you up to 30 years to repay your loans. Just remember, if you choose to lengthen your repayment period, you will also make more payments in the future and pay more interest as well. Review the terms and conditions carefully to make sure this makes the most sense for your unique situation. You may have access to alternative repayment plans that you would not have had before, and you’ll be able to change your variable interest rates to a fixed interest rate.

Most federal loans are eligible for loan consolidation, including direct subsidized loans, direct unsubsidized loans, subsidized federal Stafford loans, unsubsidized federal Stafford loans, direct PLUS loans, supplemental loans for students (SLS), and many more. Check with the U.S. Department of Education’s consolidation servicers to make sure your loan type can be consolidated.

Federal Student Loan Repayment Plan

There are several different types of student loan repayment plans available. There are income-based plans, “Pay As You Earn” plan from the Obama administration, standard plans, extended plans, and graduated plans to name a few. You can use the Repayment Estimator tool to estimate your federal student loan payments under each repayment plan:  https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action

Obama just recently announced that he’s expanding his “Pay As You Earn” program that lets borrowers pay no more than 10% of their monthly income in loan payments. Currently, the program is only available to those who started borrowing after October 2007 and kept borrowing after October 2011. Obama plans to start allowing those who borrowed earlier to participate, potentially extending the benefit to millions more borrowers.

Loan Forgiveness, Deferment, or Forbearance

There are some programs out there that will forgive all or some of your federal student loans if you work full-time in certain public service related fields. Jobs such as public safety, teachers, nurses, and a few others fall into this category. This program discharges any remaining debt after 10 years or after making 120 consecutive qualifying payments on those loans while employed full-time by certain public service employers. The Public Service Loan Forgiveness (PSLF) Program is intended to encourage individuals to enter and continue to work in public service jobs.

If you are having trouble paying loans back due to economic hardship, unemployment, military deployment, health problems, or enrollment in school, there are ways to postpone your federal and/or private loans. The two different options are called Deferment and Forbearance. Deferment allows you to postpone making your federal student loan payments. Interest will not accrue during deferment.  For unsubsidized loans, you will continue to be responsible for the interest. Forbearance allows you to completely stop payments or reduce payments for a specific period of time, but interest continues to accrue. Forbearance is intended for borrowers who have a temporary need to postpone payments and expect to be able to return to payments within a few months.

Postponing or reducing your monthly payments may help you avoid defaulting on the loan. Be sure to keep making on-time payments until the deferment or forbearance is in place and active. There are some negative aspects to Loan Deferment and Forbearance; you should avoid these two options if possible. Both options are better than defaulting, but if you continue to put off paying your loans back, you’re only making your total loan balance longer and adding years to your original repayment schedule.

Debt Snowball Method or High Interest Rate Method

Another method to help you pay off your student loans as quickly as possible is the Debt Snowball method. This technique involves paying off your student loans by starting with the lowest balance and working up to the highest. This way you can cross those smaller debts off the list before tackling the more intimidating ones. It gives you more hope and encouragement because you can start to see some progress.

It’s very important to make sure all of your minimum required balances are paid each month. It may be a good idea to utilize automatic bill payment to accomplish this. Next, send any additional money you find in your budget to the debt with the smallest balance. Once that is paid off, begin working on the second smallest, and so on and so forth. Always contact your loan service providers to be certain that any extra money you’re sending in is applied to the principal and not the interest.

The other method to paying off student loan debt is called the High-Interest Rate method or “Debt Avalanche method.” This technique shifts the focus from the size of the debt (balance) to the interest rate associated with each loan. If you are using this method, you line up your debts from the highest interest rate to the lowest interest rate. You start paying more on the loan with the highest interest rate. Continue through the list until all of your debts are paid off. Just like with the Debt Snowball method, you need to be sure to pay the required minimum monthly payment on all of your other loans.

Are you having trouble paying off your student loans? Do you have any questions regarding your student loans? If so, please leave us a comment below. Thank you!


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