Have you looked at the cost of attending college recently? The price of tuition and fees has increased, on average, $280 per year for the last decade, according to College Board. That adds up over time, so it’s no wonder many turn to student loans to afford their education.
But now that you’re approaching the end of college — or perhaps you’re already done — it’s time to figure out how you’re going to repay those loans. Before you make a decision about how to move forward, here are five things you need to know as a student loan borrower.
1. The Difference Between Federal & Private Student Loans
The first step in deciding how to pay off your college debt is knowing whether you have federal or private student loans.
Federal student loans are issued by the government. These loans have interest rates set by Congress and come with certain protections and benefits (like income-driven repayment options, deferment/forbearance and loan forgiveness).
Private student loans, on the other hand, are issued by financial institutions. They usually have higher interest rates than the loans you get from the government. Private loans don’t come with the same benefits as federal loans. But some of the best lenders will offer options to borrowers who experience financial hardship.
To simplify the repayment process, you can consolidate all of your federal loans together to make one payment each month. But you can’t include private loans in a federal consolidation.
On the other hand, if you refinance your loans privately, you can include federal and private loans together in one big loan. However, once you refinance your federal loans, you lose those benefits and protections mentioned above.
When I was faced with this choice, I consolidated my federal loans and refinanced my private loans separately. Sure, I made two payments for a while until I paid off the private loans. But this ensured that the bigger chunk of my debt — my federal loans — retained protection.
2. When & How to Enroll in an Income-Driven Repayment Plan
If you can’t afford your student loan payments, there is hope. If you have federal loans, you can set up a repayment plan based on your income.
The government offers income-based repayment plans for different situations. Your payment each month is limited to a percentage of your income. At the end of a set term, if you still have some federal student debt left, the remaining balance is forgiven.
You can’t get income-based repayment for private student loans, however. If you refinance federal student loans privately, you lose access to income-driven repayment options.
Be careful when choosing income-driven repayment, though. A longer loan term and a lower monthly payment can mean that you actually end up paying more than you expected over time. On top of that, there is a good chance that loan forgiveness might come with hefty tax consequences.
By the time you’re done with college, it’s not surprising if you don’t know exactly how much you owe. Thankfully, this is a simple problem to solve.
The Department of Education will usually assign a servicer to your account. Private lenders usually will, too. Your loan servicer is the middleman between you and your student loan lender. They’re in charge of facilitating payments, making sure the terms of the loan are met and working out a payment plan if you’re struggling to keep up.
Of course, if you have several student loans, you probably also have several servicers. And it’s not always easy to figure out who they are.
To find federal student loan information about what you owe and who services your loan, go to the National Student Loan Data System. Select “Financial Aid Review” and accept the terms and conditions. You will need your FSA ID, but you can create one if you don’t have one yet. Once you’re in, you can see how much you owe, how much you’re paying in interest and how to contact your loan servicer.
When it comes to private student loans, the best way to find out who services them is by checking your credit reports. Your credit report will list all your open accounts. (You can view a free snapshot of your credit report, with updates every two weeks, on Credit.com.)
4. Refinancing Your Student Loans Can Save You Thousands
If you want to save thousands of dollars over the life of your loans, refinancing your student loans can be a solid option. Depending on your credit and income, it’s possible to get a much lower interest rate through refinancing.
Refinancing means taking out a new loan with a private lender to pay off your existing loans. The goal is to consolidate student loans, get a lower rate and/or secure a new repayment term.
The decision to refinance should be made carefully, however. Again, refinancing federal loans with a private lender means forfeiting many government-backed benefits.
Check with different lenders to see what rate you can get if you refinance. Also, consider your eligibility for income-driven repayment. Many high-earning professionals with a lot of student loan debt don’t qualify for income-driven plans. In such cases, it can make sense to refinance privately to take advantage of long-term savings.
5. Extra Payments Can Cut Years Off Your Repayment (& Save You Money)
Finally, making extra payments can help you save more money over time. If you don’t want your student loan debt hanging over your head, you can pay it off faster as your income increases.
Extra payments reduce your principal balance. That cuts down how much you pay in interest and the how long it takes to pay off your debt. Consider refinancing to a lower interest rate, then making extra payments to supercharge your savings and pay off your loans faster.
American consumers owe mountains of debt, but one of these mountains looms large over all the others: student loans. It’s astonishing to consider: Add up every auto loan in the country, and total student loan debt is bigger. Add up every credit card bill in the country, you only get about three-quarters of the way up the student loan mountain. Only mortgage debt is greater, but those with mortgages have homes to show for their debt. These days, many Americans aren’t really sure what they got in return for their oppressive student loan bills.
There is little disagreement that adult life in America without a college degree is a struggle, and it’s only going to get harder as the economy continues to modernize and manual labor continues to be devalued. So it’s imperative that America figures out how to educate its young people without bankrupting them — but it’s important to understand how we got here.
A History Lesson
In some ways, you can blame the Russians. Sputnik, and the Space Race, specifically. The federal government first got into the student loan business as a direct result of the USSR’s successful launch of Sputnik into orbit, and widespread fear that America was losing the Space Race. In fact, the law that created student loans was called The National Defense Education Act.
America has lent money to teenagers ever since, with the good intentions of helping them compete in the global economy. Today, some 44 million Americans owe student loan debt — a majority of college students graduate with at least some debt, and the class of 2016 had an average student loan debt of $37,000.
But even before the National Defense Education Act went into effect, America had committed to helping young kids who showed promise get college degrees. The federal government’s first real foray into pushing people towards college was The Servicemen’s Readjustment Act — the GI Bill — passed at the end of World War II. Colleges swelled as America repaid some of its debt to the Greatest Generation through free or discounted college.
By the 1950s, there were calls to extend what was generally considered a wildly successful program. But three terms in a row, a Senate-passed measure to increase federal funding for college died in the House. Then, on October 4, 1957, the Soviets sent shock waves through the country with their successful launch of Sputnik into space. That day Sen. Lister Hill (D-Alabama), chair of the Education and Labor Committee, read a memo from a clerk with a clever idea.
Hill latched onto the idea and National Defense Education Act was born.
Despite widespread public opinion demanding government action “in the wake of Sputnik” (the Senate history page’s words), House members were still resistant, calling federal college grants “socialist.” Other critics worried that the legislation interfered with the long-held principal that states and local communities were responsible for schooling. As debate progressed, supporters in the Senate offered a compromise: Much of the aid offered would come in the form of low-cost loans instead of grants.
That argument won the day. Dwight Eisenhower signed the National Defense Education Act in September 1958, 11 months after Sputnik’s launch. Uncle Sam was now a bank for college students.
Uncle Sam Becomes a Direct Lender to Students
NDEA loans are generally considered precursors to subsidized loans that became known as Perkins Loans.
That because it wasn’t long before the NDEA was expanded, and its inherent encouragement of defense-friendly subjects dropped. An amendment to the law signed by Eisenhower in 1964 increased funding, raised borrowing limits, and struck the provision that special consideration should be given to students who showed proficiency in math, science, engineering, or foreign languages.
By 1968, America had spent $3 billion extending student NDEA loans to 1.5 million undergraduate students.
In other words, Uncle Sam’s role as a direct lender for higher education was fairly well established by the time Lyndon Johnson’s Great Society ideas took hold. In 1965, the Higher Education Act included a further expansion of both loans and grants, this time aimed at lower-income Americans. The HEA established what we now know as the Free Application for Federal Student Aid (FAFSA), and directed the Department of Education to administer lending. Thus, the Guaranteed Student Loan (precursor to the Stafford Loan) was created.
HEA loans were different than NDEA loans in an important way, however. Students borrowed from banks, with the federal government acting only as a guarantor. That made Uncle Sam a co-signer, expanding the kind of funding available. (Since then, Congress has vacillated between preferring the co-signer role, and the banker role. Today, most federal loans are direct loans, but that could change again.)
Not surprisingly, college attendance soared, more than doubling from 1960 to 1970 (from 3.5 million to 7.5 million).
The Higher Education Act requires reauthorization every five years, each one a chance for Congress to change the law. Many of those provisions have been intended to expand the opportunities afforded by it. The 1972 Equal Opportunity in Education Act, known as Title IX, was passed to prevent discrimination based on gender. That same reauthorization also created the Student Loan Marketing Association (Sallie Mae), designed to encourage lending. In the 1980 reauthorization of HEA, PLUS loans were created, ultimately allowing parents to borrow money from Uncle Sam to pay for their kids’ college.
As Enrollments Rise, So Do Tuitions
Each loan expansion meant college attendance continued to expand, hitting 10.8 million by 1983. Today, it’s 20 million.
With more customers, and more funding, it should be no surprise that college tuition has soared right along with them. According to the College Board, annual tuition at a public (state) college averaged $428 in 1971-72. This year, it’s $9,648. During that same span, private tuition rose from $1,883 to $33,479.
So it should be no surprise that a chart showing the total outstanding student loan debt looks like a picture of the steep side of Mt. Everest. In 1999, former students owed $90 billion. By 2011, that figure had grown to $550 billion, an astonishing 550%. Since then, student loan debt has more than doubled … again.
It’s important to note, however, that while one theory holds that the history of ever-widening availability of credit has led directly to higher tuition costs and higher debt, that’s not the only possible explanation. Higher education advocates also point to reduced state government spending on state colleges. As one example, Ohio State received 25% of its budget from the state in 1990. By 2012, that percentage had fallen to 7%. Students, often via borrowed money, must pay the difference.
F. King Alexander, president of Louisiana State University, painted a bleak picture in testimony before a Senate committee during 2015. More generous federal loan programs created in the 1950s and 60s had an unintended consequence: They nudged budget-crunched state governments towards a dark solution.
“State funding for higher education sits currently around 48% to 50% below where it was in 1981,” he said. “It was assumed that any new federal funding policies would simply supplement state funding, not replace it.”
But, today, states are ”getting out of the higher education funding business, to the point that the federal government has now become the primary funding source,” Alexander said. And while schools, states, and the federal government argue about the higher math of higher education, many students are left with personal education budgets that just don’t add up. To put a fine point on it, attorney and student loan expert Steven Palmer offers this sobering example:
“In 1981, a minimum wage earner could work full time in the summer and make almost enough to cover their annual college costs, leaving a small amount that they could cobble together from grants, loans, or work during the school year,” he says in a blog on the topic. “In 2005, a student earning minimum wage would have to work the entire year and devote all of that money to the cost of their education to afford one year of a public college or university.”
A Longstanding (But Growing) Problem
It’s important to note that burgeoning student loan debt — and the inherent problems those bills present to borrowers and their families — did not go unnoticed until recently. In fact, back in 1987, a New York Times article summarized the issue in a paragraph that sounds an awful lot like something Vermont Sen. Bernie Sanders might have said during the 2016 Democratic Party primary races.
The growth of the problem is affecting not only individual lives, some authorities believe. They say the burden of debt is also chasing many students away from poorly paid public service jobs and forcing others to defer the start of a family and the purchase of a home or car, with economic and social consequences that have not been measured … Such cases worry education officials and other experts, who say that record borrowing for college threatens the financial stability of a generation of young people and their families.
At the time the article was written, the average debt for public college graduates was $7,000 ($15,000 in 2017 dollars). Since then, college tuition has risen at about four times the rate of inflation, and student debt, right along with it.
How Do We Fix Those Inherent Problems?
President Donald Trump did discuss the student loan problem on the campaign trail; his most significant proposal involved slightly more expensive, but also more generous income-based repayment plans for debtors. His plan would require 12.5% income contributions, but provide loan forgiveness earlier. The timetable for such a proposal is unclear.
The newly-minted head of the Department of Education, Betsy DeVos, said during confirmation hearings that the (then) $1.3 trillion in student loan debt is “a very serious issue,” but didn’t indicate support for any particular solution. In her testimony, there is this tea leaf:
There is no magic wand to make the debt go away. But we do need to take action. It would be a mistake to shift that burden to struggling taxpayers without first addressing why tuition has gotten so high. For starters, we need to embrace new pathways of learning. For too long, a college degree has been pushed as the only avenue for a better life. The old and expensive brick, mortar, and ivy model is not the only one that will lead to a prosperous future.
A comprehensive solution will almost certainly require another reauthorization of the Higher Education Act. The last reauthorization was signed by George W. Bush in 2008. It has been temporarily extended since then — Congress punted on a reauthorization during election season, which means it is overdue for another overhaul. DeVos told the Senate that she’s ready to get to work on that.
“I look forward to working with Congress and all stakeholders to reauthorize the Higher Education Act to meet the needs of today’s college students,” she said. The Education Department did not immediately respond to Credit.com’s request for comment as to whether there were any updates regarding DeVos’ plans since she testified.
Many issues remain on the table: Stakeholders are already arguing about enforcement of new rules against for-profit schools and the future of government direct lending vs. “co-signing” for borrowers. But the $1.4 trillion, 70-year-old problem is now an elephant in America’s living room — and no administration can make debt like that simply disappear.
What Can Students Do?
While solutions to the systemic student loan problem are unlikely to come to fruition overnight, there are some steps struggling borrowers can take to stay current on their payments — and to preclude that debt from harming their credit. (You can see how your student loans may be affecting yours by viewing two of your free credit scores, updated every 14 days, on Credit.com.)
Federal student loans borrowers, for instance, can apply for a deferment or forbearance if they’re temporarily unable to repay those bills post-college. They can also apply for an income-based repayment plan that can help lower monthly payments to an affordable level. Private student loan borrowers may also have these options available to them, but it varies by lender and there may be fees attached to certain requests. (It’s best to ask about these options ahead of time — you can find more about vetting private student lenders here.)
There are also ways to lower the cost of your college education before and while in school. These options include looking into scholarships and grants, working part-time while taking classes and attending community college for few years before transferring to a four-year institution — more on how to pay for college without building a mountain of debt here.
The average tax refund is more than $3,000. When you hear that number and do your taxes, only to find out that your refund is much less — or worse, that you owe money — it can be tempting to fudge the numbers and increase your refund.
But misrepresenting your income on your return counts as tax fraud, and has serious consequences. Below, find out what happens if you lie on your taxes and what IRS penalties you could face.
1. You Can Get Audited
Because the IRS gets all of the 1099s and W-2s you receive, they know if you do not report all of your income. Even if you accept unreported payments in cash or check, your financial activity can reveal red flags about what income you do not report, potentially triggering an audit.
An IRS audit is an extensive review of your taxes and financial records to ensure you reported everything accurately. Though most people have a less than 1% chance of being audited, it’s not worth the risk.
Undergoing an audit is a time-intensive and costly process that involves providing years of documentation and even in-person interviews. If the IRS audits you, you can (and probably should) hire a professional to represent you and your interests. While that’s a smart idea, it can be a pricey, unexpected cost.
While the IRS may have only flagged one return for audit, they can review any return from the past six years. If they find more issues, they can add penalties and fines for every year they find problems. If you made tax mistakes for the past several years, you could end up owing thousands for taxes you misrepresented.
2. Tax Fraud Carries Heavy Penalties and Fees
If the IRS does select you for audit and they find errors, the penalties and fines can be steep.
According to Joshua Zimmelman, president of Westwood Tax and Consulting, fudging your taxes to reduce your tax bill or boost your refund can cost you more in the long run.
“If you don’t pay your tax liability by the due date, the IRS will charge you a late payment penalty. Even if you file on time, you may still be charged a late payment penalty if you under report your income and the IRS finds out,” Zimmelman said.
And the penalty is just the start. The IRS can also charge you interest on the underpayment as well. “If you’re found guilty of tax evasion or tax fraud, you might end up having to pay serious fines,” said Zimmelman.
While tax evasion or tax fraud is normally imagined as something that affects high earners and big executives, even those with lower incomes need to be careful. When describing the penalties for tax fraud, the IRS does not differentiate between income amounts or how much you underpaid your taxes. If you falsify any information on a return, they can fine you up to $250,000.
3. Criminal Charges Are Possible
Besides potentially owing thousands in IRS penalties, fees, and interest, you could also face criminal charges.
“Tax fraud is a felony and punishable by up to five years in prison,” said Zimmelman. “Failing to report foreign bank and financial accounts might result in up to 10 years in prison.”
Criminal investigations and charges start when an IRS auditor detects possible fraud during their audit of your returns. Courts convict approximately 3,000 people every year of tax fraud, signaling how serious the IRS takes lying on your taxes.
The odds of the IRS charging you for fraud is relatively small — if you’re investigated, the chances are less than 20 percent that you’ll face a criminal charge — but the potential consequences are severe. It’s not worth the risk to get a little extra money in your refund.
4. You May Miss Out on a Mortgage or Loan
Finally, not reporting all of your income can have serious ramifications when it comes to buying a car or a home.
“If you under-report your income, it might hurt you when you try to buy a house or apply for a personal loan,” said Zimmelman. “You might not get it if it looks like you cannot afford to pay it back, so lying on your taxes may hurt in that respect.”
When mortgage companies and banks review your application, they request copies of your tax returns to check your total income. If you lied about your income to lower your tax liability, your full income won’t be on the return. That means you may be denied for the loan you need, hurting your financial future.
Accurately Report Your Taxes
No one likes owing money at tax time or missing out on a big refund. But tax fraud is a serious criminal action, and glossing over your income or boosting your deductions counts as lying to the IRS.
Saving yourself a little money at filing time can end up costing you thousands of dollars with auditing, penalties, and fines. Save yourself the trouble and report your information accurately.
If you’re struggling with a medical emergency, unemployment or other financial crisis, making your student loan payments can be impossible. Rather than fall behind, you can opt to put your payments on hold through student loan deferment or forbearance.
Deferment is an option that lets you postpone both your principal and interest payments. If you qualify, you can pause payments for up to three years. Forbearance is more temporary — you can postpone or reduce your monthly payments for up to 12 months.
However, delaying your payments through deferment or forbearance can have serious financial repercussions. Depending on the type of loans you have, your loan balance can continue to grow due to interest and other fees.
Choosing Deferment or Forbearance
Below, find out how your loan type affects deferment and forbearance, and what alternatives you may have.
Deferring Federal Loans
With certain federal loans, you don’t have to worry about interest payments if you enter deferment.
If you have federal Perkins loans, Direct subsidized loans or subsidized Stafford loans, the government will cover the interest that accrues on your loans while your loans are in deferment. With your interest taken care of while you get back on your feet, you will have less to pay back in interest.
If you have unsubsidized federal loans or PLUS loans, the government will not pay for the interest that accrues during deferment. If you defer your loans, they will continue to gain interest, possibly causing your balance to balloon and costing you thousands. Not to mention your debt-to-income ratio will get worse, making it more difficult to qualify for new credit such as a mortgage or car loan. (Not sure where your credit stands? You can view two of your scores, with updates every 14 days, for free on Credit.com.)
Unlike deferment, your federal loans will continue to accrue interest in forbearance, regardless of the loan type. Because interest continues to build, entering forbearance can be costly, but it’s still better than missing payments and defaulting on your loans.
Is Deferment/Forbearance Available on Private Loans?
Technically, deferment and forbearance are federal loan benefits. Not all private loan servicers offer similar options — but some do. For example, SoFi offers deferment for students who are going back to school. And if you’re facing a financial difficulty, you may be able to enter forbearance for up to a year.
If you’re experiencing financial hardship, it’s worth asking your servicer if deferment or forbearance is an option. Just keep in mind that entering deferment or forbearance with private loans can be more expensive than federal loans. There are often fees you have to pay, and interest will accrue while you postpone your payments.
Alternatives to Deferment or Forbearance
If you want to avoid pausing your student loan payments completely, there are other ways to manage payments when they’re too high:
Income-Driven Repayment Plans
If you have federal student loans, you may be eligible for an income-driven repayment (IDR) plan. There are four IDR plans available today: income-based repayment (IBR), income-contingent repayment (ICR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE).
Under each plan, the basics are about the same: The federal government extends your repayment term 20 to 25 years and caps your monthly payment at a percentage of your discretionary income. At the end of the term, your remaining balance (if any) is discharged. You still have to pay income taxes on the forgiven amount, however.
Enrolling in an IDR plan can drastically reduce your payments and give your budget more breathing room. Depending on your income and family situation, you may qualify for a payment as low as $0 per month.
Unfortunately, if you have private loans, your options are more limited. But one effective way to reduce your monthly payments is to refinance your debt. By refinancing, you take out a new loan that pays off your old private loans. Your new loan will have completely new terms, including — ideally — a lower interest rate.
Refinancing private loans can help lower your payments and help you pay less in interest over time. It’s a smart way to save money while giving yourself more room in your budget. Be sure to keep in mind that if you refinance federal student loans with a private lender, however, you forfeit federal protections such as IDR and deferment/forbearance eligibility.
Deciding What to Do in a Hardship
Student loan forbearance and deferment are useful options when you experience a financial hardship. If you’re facing an emergency and can’t keep up with your payments, deferment or forbearance can give you a much-needed break while you get back on your feet.
While entering deferment or forbearance is a much wiser option than defaulting on your debt, there are still consequences. Make sure you understand the financial impact of postponing your payments, as putting them off can add thousands to your student loan balance. And in the case of private loans, postponing may not be an option at all.
If you’re struggling to keep up with your loans, the most important thing is to be proactive and talk directly with your servicer to find out what options are available to you.
When you’re so good at saving money that you can retire at age 31, people understandably want to hear your money tips. That’s how Clark Howard ended up with his own radio show, where he takes consumers’ questions about all things personal finance.
As it often is, debt has been a popular topic recently, and Howard has a few tried-and-true tips he likes to share with consumers. Whether you’re committed to paying down huge credit card balances or simply want to avoid ending up in debt, here are three things Howard recommends you do.
1. Always Save Some Money
Saving money is Howard’s primary approach to getting out of debt. Shoot for a savings rate of a dime per dollar earned (or 10%), but if you’re not saving anything right now, start by setting aside a penny per dollar (1%) and increase your savings rate every six months, he said.
“Now you may wonder, what does this have to do with eliminating debt in your life?” he said. “You have to start off by learning to live on less than what you make.”
Unless you can find a way to make more money, that means you need to cut things from your budget and put that extra money toward your debt (or a savings account, so you don’t have to turn to a credit card in an emergency).
2. Pay More Than the Minimum
“A lot of people pay the minimum payment because that’s what the bill says,” said Alex Sadler, managing editor of Clark.com. Doing that could leave you in debt for a very long time, so make it a priority to budget for more than the monthly payment. Credit card bills also include a section that says how much you need to pay each month in order to get out of debt in 36 months (three years), which can help you figure out how much room you need to make in your budget to get out of debt.
When you have multiple debts to pay off, Howard recommends using the “laddering method” to save the most money. That means focusing on the debt with the highest interest rate first.
“Keep throwing money at it, and [on] all the others pay the minimum,” Howard said. “Methodically, step by step, work your way to zero debt.”
It helps to make a list of all your debts and their interest rates. In fact, most people who call Howard don’t know how much debt they have, so sitting down and getting a sense of the numbers is a great place to start.
“If you ever want to get out of debt … the first thing you have to do is figure out how much debt you owe, and then you can make a plan,” Sadler said.
3. Find a Cheaper Alternative
One of the most common kind of questions Howard gets these days is about student loan debt, particularly from older consumers who borrowed or cosigned on behalf of children or grandchildren. As with all kinds of debt, the best thing to do is avoid it in the first place, because once you’re in debt, there’s usually not much you can do to get rid of it other than pay it off. (This is especially true of education-related debt, because it’s rarely discharged in bankruptcy.)
“The reality with anybody approaching college is the cost of college needs to be the highest priority,” Howard said. “You may have your favorite, but if your favorite would put you into very heavy debt or your family into very heavy debt, you need to go with a different school.”
Though he’s talking about education, that approach applies to anything that could put you in debt. You can’t always avoid going into debt, but if you save up as much as you can and opt for more affordable things (like a vehicle with fewer options or a home with most but not all of the things on your wish list), you’ll end up borrowing less and spending less money on interest.
As you work to pay down and stay out of debt, keep an eye on your credit scores. Not only will good credit help you qualify for better terms on things like an auto loan or mortgage, it can also make it easier to get everyday necessities like a cell phone or utility accounts. You can see two of your credit scores for free, with updates available every 14 days, on Credit.com
The Federal Reserve’s benchmark interest rate is on the rise. These rates already increased once in December, and experts are predicting another three rate increases for 2017.
This could mean more earnings on your savings, but it could also mean higher interest on your debt. While that’s hardly a welcome announcement for anyone paying down debt, it’s not all bad.
Federal Rates on the Rise
You might be wondering why, in a time of deep student loan debt, the Federal Reserve would consider raising its rate. According to Janet Yellen, the Fed’s chairwoman, the rate increase is “a vote of confidence in the economy.”
This is because the Fed decreases its benchmark rate during times of economic uncertainty. Since the Great Recession, rates have been historically low to give borrowers a chance to get out from underneath crushing debt. But as the economy improves, the rate needs to increase to prevent inflation.
In short, a higher federal benchmark interest rate means a strengthening economy. But what does it mean for your student loans? That answer will depend on the kind of student loans you have.
Fixed-rate student loans have interest rates that remain the same for the entire repayment period; they don’t change with the market. So let’s say you took out a 10-year student loan with a fixed rate of 6%. If the Fed raises rates today, your student loan interest rate will remain 6% until the loan is paid off. However, anyone who takes out a new loan after rates increase could end up with a higher rate than you.
If you have a private student loan, on the other hand, it could have a variable interest rate. Variable rates are tied to the market and can increase or decrease according to federal rate changes. How much and how often the rate changes is up to the particular lender.
If you’re wondering whether the rates on your student loans are fixed or variable, read your statements to find out. While you don’t have to worry about federal fixed-rate student loans, there’s no telling how much a variable-rate loan might increase. The Fed’s rate is a benchmark, but it’s entirely up to banks and lenders where to go from there.
How to Handle Rising Rates
If you have variable-rate student loans, it might be a good idea to do something now in case of potential increases. Here are a few things you can do to get ahead of the curve.
1. Look Into Refinancing
If you’re worried about any variable rates on your private student loans rising, refinancing can be a good strategy for lowering your rate as well as switching to a fixed-rate loan.
Currently, it’s only possible to refinance student loans through a private lender. That means refinancing federal student loans would result in some drawbacks, including the loss of federal loan protections such as forbearance, deferment and forgiveness.
In this case, however, there’s no need to refinance federal student loans; refinancing private variable-rate loans is what will protect you against future rate increases.
2. Strategize to Pay Your Loans Off Faster
If your rates are already as low as possible, an interest rate hike might be good motivation to get ahead of your debt.
Of course, you might not have the extra cash to pay off your loans faster. Instead try making bi-weekly payments: Split your monthly payment in half, and apply that amount to your loans every other week.
Why? This will result in making one extra payment per year without taking a huge chunk out of your budget. Just make sure your first two bi-weekly payments hit your account before the next month’s due date. You want to avoid accidentally paying less than the minimum.
3. Communicate With Your Servicer
If the interest rate on any of your student loans does increase and your monthly payment grows beyond what you can afford, contact your loan servicer immediately.
It can be a scary step to take, but it’s far more helpful than ignoring an impending issue. Missing payments on your student loans risks going into default, taking a big hit to your credit score — or even having your paychecks or tax refund garnished. Most lenders would rather work with you to come up with a payment plan, so find out what your options are right away. (Not sure where your credit stands? You can view two of your credit scores, with updates every two weeks, on Credit.com.)
Whatever You Do, Don’t Panic
Anyone with student loan debt can speak to the way it seems to affect every aspect of life. That’s why news of things like an interest rate hike can be so worrisome. But if you’re feeling nervous right now, don’t panic.
When the Fed raises rates, it does so incrementally. Though your lender doesn’t have to follow suit with an incremental increase, you probably won’t see a massive jump in your current rate. Until you know what your lender is going to do, stay calm and keep making those payments.
Use these tips to help you get out from under the rock of student loan debt. No matter what the Fed does to its benchmark interest rate, you’ve got this.
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.
Nearly 40% of student loan borrowers are concerned that Donald Trump’s administration will negatively impact their student loans, according to a new survey from Student Loan Hero. As the country moves into a new era of governance, some graduates are concerned that an already-difficult student debt situation will get worse.
In fact, more than one-fourth (26.6%) of survey respondents admitted they believe a Trump administration will have a “very negative” effect on their student loans. On the other hand, about 40% said they think Trump will have neither a positive nor a negative effect on their student loans, and the remaining respondents (about 20%) said they think he will have a somewhat or very positive effect on their student loans.
These figures come from a poll conducted by Google Consumer Surveys on behalf of Student Loan Hero from Jan. 6 to 9, and the results are based on a nationally representative sample of 1,001 adults with student loans living in the United States.
In the last few years, there’s been quite a lot said about the growing student loan crisis. But what can be done? Student loan borrowers have some idea of policy changes they’d like to see implemented during the Trump administration.
Borrowers Want More Student Loan Forgiveness Options
When asked which student loan changes they would like to see implemented under Trump’s administration, nearly half (44.3%) of respondents chose “federal loan forgiveness after 15 years.” In a speech during his campaign, Trump mentioned something along those lines, proposing a repayment plan in which borrowers pay 12.5% of their income for 15 years, after which any remaining balance would be forgiven. (Whether or not that’s a viable proposal is another matter.)
Currently, student loan borrowers can have their loans forgiven after 20 to 25 years of payments on a federal income-driven repayment plan. There is also a program for federal student loan forgiveness after 10 years in a qualifying public service job (only payments made after Oct. 1, 2007 count). Additionally, borrowers in certain industries can qualify for partial loan forgiveness. However, not everyone qualifies for these forgiveness programs; of those who do, not all will actually have any debt left over by the time the repayment term is up.
It’s not surprising many student loan borrowers expressed interest in a federal loan forgiveness program that discharges student debt after 15 years. According to the survey, 25% of respondents have either stopped making student loan payments or have lowered the amount they put toward repayment in the hope that the government will forgive student loan debt in the future.
Borrowers Also Want Refinancing Options
Student loan borrowers aren’t just asking for forgiveness. Close to one-third of respondents (31.4%) would like to see a program to refinance federal student loans implemented during a Trump administration.
Currently, it’s only possible to refinance through private lenders — the federal government doesn’t offer a refinancing option. The problem is that refinancing federal loans with a private lender means losing access to federal protections such as income-based repayment, deferment, forbearance and some forgiveness programs. Not to mention, borrowers are subject to credit checks and other underwriting criteria that’s at the discretion of each individual lender.
A federal refinancing program could help more borrowers gain access to refinancing options, retain their federal benefits and allow them reduce their interest charges.
How Much Debt Do Student Loan Borrowers Have?
Addressing student loan debt is likely to be on the radar for the incoming administration, especially with nearly $1.4 trillion in student loan debt outstanding.
According to the survey, more than one-third (36.4%) of student loan borrowers have more than $30,000 in debt. Nearly one-fifth (19%) have more than $50,000 in student loan debt. Interestingly, 7.5% of the survey’s respondents aren’t even aware of how much debt they have.
It’s yet to be seen how Trump or Betsy DeVos, his nominee for Secretary of Education, will handle what many consider to be a crisis, but the consensus seems to be that something needs to be done. In response to a request for elaboration on Trump’s student loan repayment proposal, a spokeswoman from his transition team said, “If confirmed, the Secretary designate looks forward to working with the President-elect, the Congress and other stakeholders to address the issues of student debt and repayment.”
No matter who is president, student loan debt can seriously impact your financial situation, including your credit score. (You can see just how much by reviewing the two free credit scores you can get through Credit.com, which are updated every 14 days.) Knowing your options when it comes to student loan repayment and refinancing will be crucial over the next four years and beyond.
It’s an old joke that’s quickly becoming reality for many student loan borrowers: “I’ll be paying off my student loans until I die.”
During the past decade, there’s been a stunning rise in student loan debt owed by older Americans. The number of Americans aged 60 or older with one or more student loans quadrupled from 2005 to 2015, the Consumer Financial Protection Bureau revealed last week. The average debt load on that group has swelled from $12,000 to $23,500. And there has been a near five-fold increase in the number of retired Americans who see their Social Security checks auto-deducted to pay off federal student loans in default.
Ken Stumpf, a 70-year-old borrower from Colorado, lays out the stark reality he and his wife face.
“We are both buried from our own student debt. Nothing to do but pay until we die,” he said.
Stumpf spent 33 years in the U.S. Army, mostly working in the Signal Corps as an information technology specialist. His mixture of federal and private student loans are current, but there’s no chance he’ll ever pay them off. In the mid-1990s, he went to graduate school to earn a master’s in Recreation and Park Administration. He borrowed $70,749 to pay for that degree. After a combination of deferrals and minimum payments, today his monthly student loan bill is a fairly reasonable $227. But his outstanding balance is $81,000 — more than he initially borrowed.
Stumpf’s wife, who is 65, is a little worse off. She borrowed $71,175 to get her college degree back in 1999. Her payment is $332; the balance is now $95,844.
“We both went back to school later in life to try to improve our marketability and get better jobs. Worked for me, sort of, not so much for her,” Stumpf said.
He’s philosophical about the debt.
“It drives us crazy … But I think we both realize that, short of winning the lottery, we won’t ever pay off $176K in student loans. And it did help me get into a career field that isn’t going away for a while,” he said. At age 70, he’s still working 25 hours a week in IT. “There are a whole lot worse off than us,” Stumpf said.
The New Normal
A new report issued by the Consumer Financial Protection Bureau finds that this may be the new standard. The share of all student loan borrowers that are age 60 and older increased from 2.7% to 6.4% between 2005 and 2015, the bureau said.
“It is alarming that older Americans are the fastest growing segment of student loan borrowers,” CFPB Director Richard Cordray said in a press release.
Older student borrowers have special problems, some of which are obvious. Incomes usually drop in retirement and 401K balances start to come under pressure, while health care costs rise. The bills can pile up. In 2013, for example, 63% of older student loan borrowers also owed mortgage debt, 67% owed credit card debt and 45% owed auto loan debt, the CFPB said. (You can see how your current debts are affecting your credit by viewing two of your free credit scores, updated every 14 days, on Credit.com.)
Still, a shocking number of older Americans aren’t paying for their own schooling, like Stumpf – they are paying off kids’ and grandkids’ loans. Around 73% of student loan borrowers age 60 and older told the CFPB that their student debt is owed for a child and/or grandchild.
The wear on finances of older Americans is showing. The proportion of delinquent student loan debt held by borrowers age 60 and older increased from 7.4% to 12.5% from 2005 to 2012; and nearly 40% of federal student loan borrowers age 65 and older are in default. Social Security benefits being “offset” to repay a federal student loan increased from about 8,700 to 40,000 borrowers from 2005 to 2015, the CFPB said.
It should come as no surprise that older Americans, when deciding which bills to pay and which to postpone, are sometimes neglecting their own health care. In 2014, for example, 39% of consumers age 60 and older with a student loan said that they skipped health care needs like prescription medicines, doctors’ visits and dental care. Only 25% of older consumers without a student loan did the same, the CFPB said.
Another problem facing older borrowers: Available options for relief, such as income-driven repayment, can be confusing. (You can go here to learn more about income-based and other student loan repayment options.) And the CFPB warns that loan servicers don’t always make getting help easy. Its report found several shortcomings in servicer treatment of older borrowers. Per the press release, a survey of complaints filed with the CFPB found older borrowers complain that servicers are:
Delaying or prohibiting enrollment in income-driven payment plans: Some federal student loan borrowers report that servicers are not advising them that they may have their loan payment amounts reassessed under an income-driven plan when their income changes. Instead, some consumers on fixed or reduced incomes report being placed in plans designed for borrowers with growing incomes. Older borrowers in default report that their Social Security benefits are offset to repay a federal student loan — despite their right under federal law to cure their default and seek payment relief under an income-driven plan.
Incorrectly applying cosigner payments to other loans owed by the primary borrower: Generally, servicers apply payments received across all serviced private student loans owed by the primary borrower.Some cosigners complain that their payments appeared short because they were spread out over all of the primary borrower’s private student loans. This practice can result in servicers charging cosigners late fees and interest charges, as well as reporting late and missed payments to credit reporting companies.
Failing to provide borrowers access to loan information: Some co-signers complain that they are unable to monitor the student loan that they co-signed because loan servicers did not respond to their requests for help in accessing account information.Others report that by the time the servicer sends the cosigner a notice of missed payments, the amount due has accrued fees and penalties. Some private student loan borrowers say they did not receive notice prior to a negative report to consumer reporting companies.
Threatening to offset private student loan borrowers’ federally protected benefits: Certain federal benefits, like Social Security benefits, are generally protected from collection for defaulted private student loans. Some older borrowers report that when the primary borrower fails to pay, servicers and debt collectors threaten to collect protected benefits.
Is Help on the Way?
“Many of these older Americans are helping to finance their children’s or grandchildren’s education while living on a fixed income,” Cordray said. “We are concerned that student loans are contributing to financial insecurity for many older Americans and that student loan servicing problems can add to their distress.”
The CFPB is advocating for new rules that would protect student loan borrowers; these could ease the burden on the over-60 student loan debtor group. The rules would make income-driven payment plans easier to access and maintain, for example.
But for now, older consumers are on the hook for an estimated $66.7 billion in student loans, and long-term solutions for borrowers like Stumpf seem far, far away.
“At our age, we know we will pass before they are paid,” he said.
You know what they say about opinions, right? Well, the same can be said about so-called no-brainer fixes to the student loan problem, as a recent Bloomberg.com article illustrates.
This particular “fix” has to do with the 57% of federal student loan borrowers who were drop-kicked out of the government’s various income-based repayment (IBR) plans in 2015 because they failed to file their income-verification paperwork on time.
According to the Obama Administration and the departments of Treasury and Education (and that post on Bloomberg.com), the process needs streamlining. How? By permitting borrowers to authorize the Internal Revenue Service to share their tax return data with the private-sector companies that administer their government-backed student loans.
Aren’t we talking about the same administrators that the government had called out for loan-servicing malfeasance?
And what about requalification as a concept? Why is there even such a thing when loan restructures—which is what we’re talking about here because interest rates and principal balances remain unchanged—are typically a once-and-done affair?
Yes, I know that income-based repayment is income specific. But if we are to take the ED at its word when it says that IBR is the key to achieving a “zero default rate among student loan borrowers,” and if this type of relief plan accomplishes this by extending repayment terms to as long as 20 years’ time — twice the duration of the standard student loan agreement — wouldn’t doubling the remaining term of any student loan yield the same result?
According to the Federal Reserve Bank of New York’s August 2016 report on consumer credit, 11.1% of all student loans are 90 or more days past due. Well, since roughly half of all these loans are actually in repayment (the balance is deferred because the borrowers are still in school), that means that more than 20% of the loans that are “live” are, technically speaking, in default.
Technically, because that’s the way all of the lenders I know treat all other consumer and commercial financings that are three or more payments in arrears.
Add to that, the loans that are between 30 and 90 days past due — because these may well portend future defaults — along with those that are being temporarily accommodated with forbearances (not to mention the loans that have already been granted conditional relief under the various income-based plans) and it’s not hard to see how nearly half of all loans that are currently in repayment are distressed.
A portfolio that is so clearly troubled is one that was improperly structured at the outset. So, if you’re seeking a true no-brainer fix, refinance the whole damn thing.
And not at the rates that are currently being charged, either.
The reason that the government has been reporting multi-billion dollar profits in this sector is because the feds are, in effect, lending long and borrowing short. Back in 2013, Congress devised a plan that charges students for borrowing 10-year money at rates that are roughly commensurate with that duration, only to have the Treasury turn around and fund the ED’s program with significantly less expensive short-term debt.
That the profits from this scheme offset the federal deficit is of course a happy coincidence. And that the government runs the risk of bankrupting its existing portfolio of reduced-rate loans if (and when) short-term rates rise to the point of exceeding those that are implicit within the underlying agreements is also beside the point. Right?
Just as Congress should acknowledge what is painfully obvious about the tenuous condition of these debts and move to refinance all government-backed student loans, so too should it devise an appropriate rate to charge.
It can start by acting like it knows what it’s doing.
Interest rates are built from the ground up. The first building block is the lender’s raw cost of borrowing, which, if we’re talking about 20-year loan terms, is the 10-year Treasury note (lenders use the so-called half-life rate for term loans). Add to that the interest rate equivalents of the costs of originating and servicing these contracts, along with a reasonable estimate for losses.
Here’s how the numbers shake out.
At the time of this writing, the 10-year Treasury note yielded 1.8%. Also at the time of this writing, the ED is charging slightly more than a 1% upfront fee for originating undergraduate student loans (a 0.1% interest rate add-on), and loan servicers are typically paid 1% for administering contracts of this type (another 0.1% interest rate add-on). As for the losses, let’s say that the government is wrong about zero defaults and put that number at 10%—higher than for any other form of consumer debt. The interest rate equivalent of that is 1.0%. Add up the pieces and you get 3.0%.
Wait a minute…
That means that the 3.76% rate that Congress concocted for the ED to charge at this time for its 10-year Federal Direct loans is overpriced by a whopping 25%. And that’s without taking into effect the fact that the pricing basis for 10-year loans should have been the 5-year Treasury note, which costs about a half a point less than the 10-year instrument.
All the more reason to reject this no-brainer fix and do what truly needs to be done: Permanently modify the contracts that are currently in place and adjust the existing program’s terms to match.
And one more thing.
Let’s not punish the roughly 50% of borrowers who are not having difficulty making their payments by forcing them to incur higher aggregate interest costs over the newly extended term. Instead, pave the way for them to continue paying what they’ve been paying by mandating that loan servicers automatically credit all supplemental remittances against principal (when no other payment-related obligations such as late fees are outstanding), rather than against future payments as is often the case.
Just because a borrower may neglect to specify his intent, or fail to realize that paying ahead on a loan is akin to remitting interest that has yet to be earned, shouldn’t mean that the lender or its subcontracted loan administrator is entitled to selfish advantage.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.