4 Life Goals You Can Still Achieve With Student Loan Debt

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There are currently more than 44 million people with student loan debt totaling over $1.3 trillion.

With so much debt, many college graduates have delayed major life milestones such as getting married, buying a house, traveling, and starting a business.

But it doesn’t have to be that way.

Although student loans can be a financial burden, you can still follow your dreams. Here’s how to get one step closer to living the life you want by reaching these four goals.

1. Getting Married

A 2013 survey by the American Institute of CPAs found 15% of respondents had delayed getting married because of their student loan debt. But getting hitched when you have student loan debt isn’t totally impossible.

One of the biggest reasons people delay marriage is the high cost of weddings. In fact, the average wedding costs over $32,000, according to The Knot. If you have student loan debt, that expense can hurt your finances deeply, reducing your chances of getting rid of your debt sooner rather than later.

But there’s no law that says you need the elaborate ceremony, giant guest list, and pricey dress. Getting married can actually be a simple and inexpensive celebration. An afternoon ceremony and a simple dinner can make getting married a financial reality, rather than waiting until you pay off your student loans.

2. Buying a Home

For many, breaking the renting cycle and becoming a homeowner is a significant life goal. But some may feel that student loan payments make it impossible to get approved for a mortgage, let alone afford one. (Keep in mind that while your student loan balances won’t necessarily keep you from qualifying for a mortgage, your credit can. You can see how your student loan payments and other credit accounts are affecting your credit by getting your two free credit scores, updated every 14 days, right here on Credit.com.)

Don’t let student loans ruin your dream of buying a house. If you know you can afford the payments, but are struggling to get approved for a mortgage because of your outstanding debt, consider refinancing.

Refinancing student loans at a lower interest rate will reduce your monthly payments, freeing up more cash to put towards student loan debt, as well as lower your debt-to-income ratio. Keep in mind, there are some potential drawbacks to consider when refinancing federal student loans. Even so, this tactic can make you look like a better borrower in the eyes of mortgage lenders.

3. Taking a Vacation

If one of your passions is exploring the world, don’t let student loans hold you back. The best way to travel abroad while keeping up with your student loans is to find ways of earning extra income.

If you can, pick up a side hustle or second job to help bolster your emergency fund. Once you have built up a good nest egg, you can set up automatic payments on your student loans. Then you can travel without worrying about paying down your debt on time.

4. Starting a Business

Launching a business when you have student loans can be challenging, but it is doable. There are ways to become an entrepreneur and still keep up with your loan payments.

Try moonlighting while working full-time to get your side business started. This approach is a smart way to minimize the risk of starting your own company. You’ll still bring in a regular salary, ultimately building your business without risking your income.

Once your business is off the ground, you can minimize your expenses and free up cash by refinancing your loans or signing up for an income-driven repayment plan that will reduce your federal student loan payments. You’ll likely get a lower interest rate and lower monthly payment after the process is done which will make your loans more affordable as your business continues to grow.

Managing your student loan debt can be a real challenge, but it’s no reason to put your life on hold. With some research and preparation, you can accomplish any of these life goals while still managing your loans successfully.

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A Quick Guide to Whether You Should Refinance Your Student Loans

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College graduates with a history of earnings and good credit may be able to save a significant amount of money by refinancing their student loans at lower interest rates, but less than half of Millennials are taking advantage of refinancing, consolidation, or other options to get a better deal.

Granted, refinancing is not for everyone. It’s best suited to people with good credit that are currently paying a high-interest rate on their student debts. Beyond that, there are also some potential drawbacks borrowers should take into consideration before they move to refinance. But it’s worth your consideration. Here we lay out the pros and cons of refinancing student loans so you can make the best decision for you.

When Refinancing Can Be Right for You

If you’ve been making your regular monthly student loan payments, but it’s still going to take many years to pay them off, your interest rates might be to blame. This is especially true if you took out your loans between 2006 and 2013, when interest rates on unsubsidized loans were higher than they are currently.

Refinancing could help you lower the rates on your loans, so more of your money can go toward paying off your principal balance. Refinancing is the process by which a borrower pays off their student loan debt by taking out a new loan with a private lender. This process can also combine all the loans you refinance into one payment.

Refinancing doesn’t guarantee lower monthly payments, but, depending on the repayment plan you choose, you could pay off your debt faster and save money.

The Drawbacks to Refinancing

Unlike federal student loans, which guarantee every borrower a fixed, low interest rate, private student loans come with fixed or variable rates and require credit checks — so, if you don’t have good credit, you could end up with a higher rate.

You also generally have fewer borrower protections if you refinance your federal student loans into private loans. For instance, private student lenders are not required to offer forbearance or deferment options. Those that do may charge a fee for the option. (You can learn more about private student loans here.)

Assessing All Your Options

If you have government loans, you’re probably aware that federal loans offer certain borrower benefits.  A debt consolidation loan from the U.S. Department of Education, for instance, allows you to consolidate multiple federal student loans into a single loan so you’ll have one payment each month. A Direct Consolidation Loan also may lower your monthly payments by giving you as long as 30 years to repay.

Income-driven repayment (IDR) plans can also help you lower your monthly payments by limiting your monthly payments to a percentage of your disposable income, and by extending your loan term by up to 25 years. Under an IDR plan, your monthly payment will be capped at 10, 15 or 20% of your income, depending on the plan.

The Drawbacks to Direct Consolidation & IDR Plans

For those borrowers looking to lower the amount devoted to student loan payments each month, these plans can be the way to go. But, here, too, there are some trade-offs to keep in mind.

Consolidation loans, for instance, won’t lower you interest rate. In fact, while that lower monthly payment can provide some much-needed relief, by increasing your loan repayment period, you’ll have more payments to make and, therefore, pay more interest. (Note: There are no prepayment penalties with a Direct Consolidation Loan, so you can pay ahead.)

Here are a few things to note if you’re thinking about an IDR plan.

  • IDR plans help you lower your monthly payments by stretching out your repayment term. Again, while this means you pay less each month, stretching out your loan term may mean you’ll end up paying more in interest overall.
  • If, for whatever reason, you need to leave an IDR plan halfway through (or you’re no longer eligible because your income exceeds the income cap), you’ll still be responsible for paying back some or all of the unpaid interest that’s piled up (this is called “interest capitalization”).
  • Under an IDR plan, you could qualify for loan forgiveness after 20 or 25 years of qualified repayments. However, if you do, remember the amount that’s forgiven is considered taxable income, and you’ll have to pay interest on it. If you work for the government or a nonprofit, and qualify for Public Service Loan Forgiveness after 10 years, that amount will not be taxed.

Student Loan Refinancing 101

If you do decide to explore refinancing, it’s important to comparison shop.  You’ll want to find out what interest rate range is being offered, whether there are any origination fees and if forbearance of deferment is an option when vetting lenders, among other things. You’ll also want to check your credit so you have an idea of what offers you may qualify for. (You can do so by viewing two of your credit scores, updated every 14 days, for free on Credit.com.) If your credit is in rough shape, you may want to take steps to improve it before applying.

Not everyone will qualify to refinance their student loans — it helps to have good credit and a low debt-to-income ratio. But while refinancing isn’t for everybody, everybody should at least consider it.

Image: Petar Chernaev

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5 Reasons Why You Might Not Want to Refinance Your Federal Student Loans

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Many private student lenders are making a big push for a piece of the student loan refinancing pie.

Banks and venture capital-backed nonbank financial services companies are hard at work slicing and dicing that trillion-dollar market into bite-size, demographically based refinancing opportunities. Their primary targets? Borrowers who have the best longer-term earnings potential because of the schools they attend, their areas of study or for other reasons.

The lure is in the form of seemingly lower rates and streamlined documentation processes, which, on the surface, presents a good deal of appeal. That is, for borrowers with higher-priced private student loans and perhaps state-sponsored debts as well.

Those who’ve funded their higher educational pursuits with government-backed loans, however, may want to think twice, for the following five reasons.

1. Credit Underwriting

Despite the fact that all education-related loans — public and private alike — are virtually impossible to discharge in bankruptcy (thanks to the successful lobbying efforts on the part of the financial services industry in 2005, atop an anti anti-establishment scheme that dates back to the mid-1970s), today’s private lenders aren’t taking that invulnerability for granted. And they shouldn’t. Not with so many consumer advocates who are calling for the restoration of the bankruptcy code with regard to this form of debt.

So unlike the federal government, which blithely continues to process loan requests as it has before, private-sector lenders are looking more carefully at a prospective borrower’s ability to service the loan he or she is requesting. Things like historical earnings, debt levels, leverage and credit scores. And when these aren’t enough (or too much, as the case may be), they’re asking for family members and others who are financially better situated to co-sign the loan.

Pity the co-signer, though, when that occurs, because they will have a heck of a time getting out from under that responsibility, even after the primary borrower’s economic outlook improves to the point of self-sustainment.

2. Fixed Versus Floating Rate Loans

Also unlike the government-backed loan programs, some private lenders are tempting debtors with what amounts to low introductory-rate financing, much the same way that some banks and private mortgage lenders tempt other consumers with adjustable rate mortgages (ARMs).

In both instances, interest-rate risk is effectively transferred to the borrower from the lender. In other words, when rates move up, so will the amount of the loan payment. When rates move down, however, you may well find the payment amount will not decline below a certain point.

Certainly, there are those who are comfortable rolling this pair of dice. The question is, is it worth the gamble in the first place?

The average level of per capita student debt is roughly $35,000 as of 2015. At 2% interest — not an uncommon introductory rate — the monthly payment on a 10-year education loan amounts to $322. In contrast, that same loan would run $350 per month under the Federal Direct program, which charges 3.76% interest at present.

I don’t know about you, but I’m not willing to wager on the direction of interest rates for $336 per year.

3. Prepayment Penalties

And then there’s the matter of loan pre-payability.

Federal student loan borrowers have the right to pay off their debt in full or in part at any time, without penalty. That means, whatever interest the borrower would have been charged over the remaining term of his or her loan is waived when the debt is fully paid off, or discounted when the loan balance is reduced quicker than it otherwise would have been.

Not necessarily so in the private sector.

Depending on the terms of the refinancing agreement, the lender may require its borrower to pay a premium — a word that the financial services industry prefers to fee — to retire their loan ahead of time.

4. Superior Relief

Perhaps the key difference between public and private higher-education loans is the quality, quantity and active promotion of the relief programs that are available to financially distressed borrowers.

Setting aside for the moment the problems that the government is attempting to remedy with the loan-servicing companies to which the Department of Education subcontracts the administration of the student loans it originates, no other lender is as willing to accommodate both temporary and longer-term hardships than the federal government.

Whether you chalk that up to Uncle Sam’s sincere desire to assist troubled debtors or to protect the taxpayers who will ultimately be left holding the bag on this financing program, hands down, the government’s income-based, income-contingent and public-service debt-forgiveness plans are superior to all others.

5. No Going Back

Last but not least, there are no round-trip tickets when it comes to financing government-backed student loans that were refinanced by private lenders. Once these loans are off the government’s books — what happens when a loan that’s made by one lender is financed at a later date by another — they are no longer eligible to be refinanced under any of the government’s standard or distressed-borrower relief programs.

With all this in mind, while it could make sense to refinance existing education-related debts that were originated in the private sector — provided you’re not being asked to give up more in the form of co-signors, prepayment penalties and so forth in exchange for that consideration — it’s hard to justify refinancing your government-backed debts in this manner.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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