Student loan debt has grown from an expected part of education to a bonafide crisis in the making. As of 2017, it has become the second highest consumer debt category, second only to mortgage debt. To give you a bit of perspective, the average student in the Class of 2016 has $37,172 in student loan debt. The fact of the matter is that even if you work through school or try to get scholarships, the vast majority of students will still require some sort of loans. With higher education being a vital part of many career paths, knowing about student loans and how to handle them is a vital skill. This article will discuss what types of loans you may take, how to pay them back, and what options you have when the debt becomes too much. Whether you are thinking of taking a loan out, are in the midst of repaying, or have your back against the wall, it is important to know your options.
Understanding Your Loans
Before taking out a loan, it is important to understand the difference between federal and private loans. Federal loans, as expected, come from the federal government. A private loan comes from a lender such as a bank, credit union, state agency or school. As a rule of thumb, the trade-off between the two is that you get a variety of benefits with the federal loan, but can borrow more with a private loan. Also, there may be a limit to federal money you can borrow.
In general, many students will require a combination of the two, depending on the price of their education and how much they need to take out in loans. Here are some of the special benefits you can get when you take out federal loans:
- You don’t have to repay your federal loans until graduating, leaving school, or changing enrollment status to less than half-time. Some private loans do not require this, but that isn’t always the case.
- Generally, federal loans have more stable interest rates. A private loan can have a lower rate as well, but they may fluctuate.
- Federal loans offer the possibility of a subsidized loan, where the government can pay interest while you are in school.
- Federal loans also can potentially qualify for loan forgiveness programs (more on this later).
If you do choose to use private loans, be certain to do your research on each lender before borrowing. Some private lenders will give you more options than others. Make use of resources like your school’s financial aid office, online information, and other sources to guide your decision.
Whether you have to pay while still in school or after you’re done, coming up with a proper plan for repayment of your loans is something that guides your financial health for much of your life. In many cases, the standard plan is a perfectly viable option for federal loans. This is a fixed payment over the course of 10 years. There are some variations on this option. These include Graduated Repayment plans, where the payments start lower and increase over a ten-year payment period. Another option is an income-based plan. In this case, your loan payments are recalculated each year based on your income and family size.
One unique option is the Public Service Loan Forgiveness (PSLF) Program. You can have the balance on your federal loan forgiven after 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. Generally, these jobs include government organizations or non-profit organizations. Be sure to check that your job is a match before pursuing this route.
For private loan repayment, your options are generally more limited. Don’t expect forgiveness or income-based repayment plans. The lack of choices is why many experts recommend focusing on paying off your private loans before your federal loans. However, at the same time, depending on your interest rates, you may want to do otherwise. An online repayment calculator may be the tool that you need.
What To Do When Repayment Isn’t An Option
Generally, people only think of declaring bankruptcy for student loans as a last resort. While there is indeed a lot to lose if done improperly, it is an option with pros and cons like everything else. One study showed that 40% of borrowers who include student loan debt in their bankruptcy filing end up getting them discharged. The reason why so many people think it isn’t a viable option is because very few people try.
In general, you should try and weigh your other repayment option before thinking about bankruptcy. Many courts use the Brunner Test to try and determine “undue hardship,” meaning that:
- You would not be able to keep a minimum living standard if you pay the loan.
- Your financial hardship would last for much of the repayment period.
- You’ve made an effort in good faith to repay the loan before filing for bankruptcy.
Should you choose to go this route, one of the best things you can do is enlist the services of a skilled debt lawyer. While many may not think of them as resources when it comes to student loan debt, the truth is quite the opposite. With student loans becoming a primary source of debt as mentioned earlier, the time has come to treat it the same way that one would handle credit card or mortgage debt once it spirals out of control. A lawyer’s assistance can be a vital tool, whether you are looking to strike before debt becomes an issue, or dig your way out of a financial hole.
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