It’s not surprising that 7 million students in the U.S. defaulted on their college loans during the third quarter of 2014, according to the Department of Education. The average amount of loan default per borrower: $14,014.
An October report by the Consumer Financial Protection Bureau saw a 38 percent jump in complaints over 2013 from students who took out private loans to finance college. The common theme among the 5,300 who filed complaints was that lenders were inflexible about providing alternative payment options for those facing financial hardship, so many were driven into default.
Many students are in precarious situations when it comes to repaying college debt. It is a dire situation, since student loans cannot be discharged in bankruptcy.
Following are some tips from college financial experts on steps to take before, during and after college to help ensure that your debt load remains manageable so it doesn’t ruin your life.
1. Find a college that fits your budget.
Prioritize the schools that are most affordable to you so you can limit your borrowing, said Rick Ross, co-founder of College Financing Group, which assists families with the college financial-aid process. If you’re eyeing a college that costs $50,000 and provides the same quality of education as one that costs $25,000, don’t head to the pricier institution, he said.
It’s best to determine in advance how much you will spend in total on college and how much you’re willing to borrow, said Justin Draeger, president of the National Association of Student Financial Aid Administrators. He said that every school is required to include a net price calculator on their website that provides a rough estimate of how much financial aid you would receive, given your income. And consider the field you’re entering and how much you’re likely to earn once you graduate. An engineering student is more likely to be able to afford higher loan payments than a social worker, for example.
A typical guideline is not to borrow more than what you anticipate earning in your first or second year after graduation. Peter Mazareas, co-founder of Invite Education, said those considering lower-paying professions may be better off at a public institution, which is less expensive. Another option, he said, is to look to schools that offer merit aid, which doesn’t need to be repaid.
Abbey Stauffer, general manager of education for NerdWallet, a personal finance website, added that students should borrow wisely, taking out only what’s needed to cover tuition, fees, room and board and avoiding the temptation to max out the loan in order to have “fun money.”
2. Start making interest payments while in college.
Though loan payments are not due until six months after graduation, the interest on unsubsidized Stafford loans begins to accrue immediately. Ross said that can multiply quickly, adding another $3,000 to a $25,000 loan. He suggests making payments quarterly throughout college and considering paying back some of the loan early as well, since reducing the principal ultimately results in a lower balance that reduces the overall interest payments over time. There’s no penalty for early payment for both federal and private loans.
3. Take advantage of the various federal loan repayment options.
Repayment is much more accommodating with the federal loans, “since there are repayment provisions based on income that are very helpful for borrowers who are underemployed or unemployed, whereas private lenders are reluctant to offer such repayment plans,” said Heather Jarvis, an attorney specializing in student-loan training and education and the founder of askheatherjarvis.com. “You almost have to go out of your way to default on a federal loan,” she said.
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There are still many students who aren’t aware of relatively recent repayment plans that could help them, said Ross. These include:
- Income-based repayment is an option that became available in 2009. It looks at a borrower’s adjusted gross income based on tax returns and makes a calculation based on that income and the borrower’s family size to arrive at a discretionary income figure, then sets the monthly payments at 15 percent of the discretionary income amount. If the loan cannot be repaid in 25 years, the remaining balance is forgiven. A pay-as-you-earn option, which has been available since 2012, is similar, but instead of 15 percent of the discretionary income, it’s set at 10 percent and the loan is forgiven after 20 years if not paid. The payments are lower, and there is earlier forgiveness.
- Under a graduated repayment plan, the borrower starts off with a lower payment that increases over time. Ross said that graduated repayments are better for public employees, where they have some sort of union contract, so they can accurately predict their future salary. But Jarvis said that for many, it’s safer to choose an income-driven plan that ties payments to actual, rather than projected, income.
- Those experiencing severe financial difficulties, like the lack of a job, can request forbearance to postpone the required monthly payments and avoid default. It delays the repayment period, but interest continues to accrue, so it’s costlier in the long run. Borrowers also can opt for partial forbearance, where they make interest-only payments while the monthly payments are deferred.
4. Choose loans that offer the best repayment plans.
The takeaway on the Consumer Financial Protection Report is that you’re better off getting federal, not private, loans. Federal loans “are cheaper and have significantly more protection,” said Rohit Chopra, Student Loan Ombudsman for the CFPB. Even though federal Stafford loans are available to those of all income levels, 55 percent of those who took on private loans in 2008 had not exhausted their limit under the federal loans, according to the CFPB report.
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Stauffer said the reason could be the perception that you need to meet a certain income limit in order to be eligible for federal loans, but that’s not true. While subsidized Stafford loans do require an income limit, unsubsidized Stafford loans do not. Parent Plus loans, which are available to parents wanting to borrow for their child’s education, also do not have an income limit, so anyone can apply for a federal loan.
Stauffer urges those needing to finance a portion of their education to complete the federal student aid application, called the FAFSA. “Submitting this is the single most important thing you can do to start the process of borrowing for school wisely,” she said. It’s also often used as the basis for awarding merit aid by schools.
5. Realize some loans offer forgiveness.
The Teacher Loan Forgiveness Program allows students who have taught five consecutive years in a low-income K through 12 district to get up to $17,500 in Stafford loans canceled. Public service loan forgiveness pardons what you owe after working 10 years full-time in a public service job.
6. Consolidate your private loans.
Under private loans, interest rates are based on a borrower’s credit rating, so this might be an option for parents who have a good credit score and can get a low interest rate, said Mark Kantrowitz, senior vice president and publisher of Edvisors.com.
If you have many private student loans with double-digit interest rates, it might be worthwhile to consider a private loan consolidation to reduce those interest rates, Ross said.
7. Don’t let the debt get you down.
If you’re encountering financial difficulties, it’s important to speak with your lender about alternatives before you default, Kantrowitz said, since you lose options if you default first. He said that if you present lenders with compelling reasons for why you can’t repay the debt—like if you have a disability or skyrocketing medical expenses—even private lenders can be accommodating. They may offer interest-rate reductions and extended repayment terms, for instance.
Draeger added that with federal loans, given the number of protections and deferments, “there are dozens of ways that students can just keep their loans in good standing without ever having to go into delinquency.”