Student loan debt in the US continues to skyrocket, reaching a staggering $US1.19 trillion as of the first quarter of 2015. That sets it far above car loans and credit card debt numbers which were $US968 billion and $US684 billion respectively.
For students who come out of college with five or six figures of student debt, paying off the balance can seem like an insurmountable feat.
But new grads can take simple steps to start off on the right foot, according to Andrew Josuweit, CEO of Student Loan Hero, a company that helps students manage their debt.
1. Make sure your information is updated
The average student loan debt now approaches $US30,000, and most students incur that debt by taking out multiple loans with multiple loan providers. This can make it difficult to keep track of all the loan payments and might even make borrowers forget about one.
The average student he works with has eight loans with two or three companies. By calling every loan servicer to make sure they have the proper information on file, new grads can ensure they don’t lose track of a loan and cause it to default.
2. Enroll in auto payments
Auto payments guarantee that you will never pay your loan back late and have to pay the resulting late fees. But it also provides another highly important advantage: it will decrease the interest rate paid on your student loans.
The industry standard for discounting for auto payments is a quarter percentage reduction off of interest rates. So, if your rate on a student loan is 6%, you will end up paying 5.75% if you enroll in auto payments.
That’s basically free money that you are not taking advantage of if you pay your loans on time without using the auto pay method.
3. Make sure you get paper statements
Even though it’s not the “green” advice, Josuweit firmly believes that you should not opt to get electronic statements for your student loans. Opting to receive paper statements keeps you conscious about the loans that you pay monthly.
Josuweit says that it’s a huge obligation and you should be aware of the principal left on your loan and the strides you are making to pay down your loan.
4. Get knowledgeable about your options
There are a number of avenues to pursue if you truly cannot meet your loan obligations. “There are real solutions for people who are really in a tough spot,” Josuweit said.
And he believes that determining the best option for yourself is crucial. “The reality is that if you can’t afford to pay … you can either chose an income based repayment program or a deferment or a forbearance,” he said.
So what’s the difference between those options?
Income-based repayment programs offer the ability for borrowers to pay back their loans based on a percentage of their discretionary income, rather than the normal payment amount. Borrowers are then eligible for loan forgiveness if they make on-time payments for a set number of years — anywhere between 20 and 25 years.
To qualify you must meet certain income requirements, which generally means your loan debt is higher than your annual discretionary income or is a significant portion of your annual income.
Deferments allow you to temporarily postpone the principal and interest payments on your loan. You will still accrue interest during a deferment, but you aren’t required to pay any money during the deferment period (typically three years).
The interest, however, will be recapitalized to your loan which means you will pay more in the future. However, there will be no impact to your credit for not paying during the deferment period. You must qualify for a deferment, which can be granted in times of economic hardship or for other reasons deemed appropriate by the US government.
If you do not qualify for deferment, you may qualify for forbearance. This allows you to stop or reduce your payments for 12 months, with the same clause that any interest that isn’t paid will be recapitalized to the loan.
The bottom line for Josuweit is that new grads should have some plan in place to tackle their monthly payments.
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