Just Graduated? Here’s What to Know About Student Loan Debt

Learn how you can tackle your student loan debt

By Kendrick Brown

Student loan debt can be like the plague to the recent college grad. You get your degree, you’re ready to start your life, and then you realize that you have to pay back the tens of thousands of dollars you amassed throughout your college years. How long is that going to take? You know you need to get rid of the debt fast, but you may not fully realize why. You may see it as another payment that you will have to make for a very long time, but it goes much deeper than that.

First, the student loan has an impact on your debt-to-income ratio. This is the percentage of debt you have versus the income you make. If the percentage of debt is determined to be too high for comfort to lenders, they won’t loan on a car or house or give you a personal loan. They’ll tell you to pay off some of your debt and then come back and see them when you bring your debt below a certain percentage of your income or your income increases enough. This can be devastating.

Even if a loan is being deferred or in forbearance, the total amount of the loan still has an impact on your debt-to-income ratio because it eventually has to be paid back. You can’t shake the debt off and pretend that it doesn’t exist. That’s why it is imperative to seek out options to help you with the cost of the debt and to even pay it off faster so you can achieve those important milestones in life.

Making Payments More Manageable

If you want to simplify your payments and possibly get a lower interest rate, you should consider refinancing. You can refinance federal student loans and private student loans together with a private lender, but don’t forget that any forgiveness benefits, hardship programs, and other benefits of federal loans are forfeited when this happens. Private lenders typically don’t offer some of the same benefits.

When you refinance and consolidate with a private lender, you can lengthen the loan term to lower monthly payments. You can also get a lower interest rate, which means the loan costs you less to have. Lower monthly payments can make it possible to eventually double up on payments so you can pay the loan off faster.

Another option is student loan consolidation. When you have multiple student loans, you have multiple payments. You can consolidate these loans into a single loan. If you have multiple private loans from different lenders, you can consolidate those with one lender. Federal student loans can also be consolidated into a single loan. Instead of having multiple payments, you have one. This is much easier to keep track of. If you wish to refinance the loan at any point, you can do so to secure an even lower rate and better terms. Again, be very careful if you wish to refinance federal loans with a private lender. Be sure that there isn’t a possibility of hardship that could cause you to default.

Federal Student Loan Repayment Programs

The U.S. Department of Education’s Office of Federal Student Aid can help graduates manage their payments through income-driven repayment plans. The exact plan depends on the amount of debt and the circumstance. There are a number of plans. For instance:

• A REPAYE Plan is usually 10% of discretionary income.
• An IBR Plan is also 10% of discretionary income for those who are new borrowers on or after July 1, 2014. The amount of repayment doesn’t exceed the 10-year Standard Repayment. For those that aren’t new borrowers, the repayment is made with 15% of discretionary income.
• The PAYE Plan is just like the IBR plan at 10% of discretionary income.
• The ICR Plan is the lesser of 20% of discretionary income or what a graduate would pay on a repayment plan with a 12-year fixed payment that adjusts based on income.

The repayment periods can be fixed at 10 years, 20 years, 19 years and 6 months, or 21 years and 10 months. The Office of Federal Student Aid will look at your situation and tell you what your options are.

Student Loan Forgiveness Options

There are different federal student loan forgiveness options. Payments must be made on time for a specific period of time and under a qualifying repayment plan. Qualifying monthly payments can’t be made when a loan is in a grace period, deferment, forbearance, or default.

The Public Service Loan Forgiveness (PSLF) Program will forgive the remaining balance on a Direct Loan after 120 qualifying monthly payments have been completed. These payments don’t have to be consecutive. A student must work for a qualifying employer full time, which means employment with a government organization or nonprofit. It takes approximately 10 years to make 120 payments and be eligible for the PSLF Program.

You Have Options

Despite how frustrating student loans can be, the good news is that you do have options. Between refinancing, consolidation, income-driven repayment plans, and the PSLF program, you can make payments more manageable and/or be free from student loan debt sooner rather than later.