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As the newest class of graduates begin to enter the workforce they’ll most likely be swimming in student loan debt, and while the costs of college continue to rise, more millennials are finding themselves buried in debt. According to Student Loan Hero, Americans owe over $1.45 trillion in student loan debt, spread across roughly 44 million borrowers. Overall, student loans are unavoidable for most graduates. While many providers allow a six-month grace period where borrowers don't need to make payments after school comes to a close, eventually the grace period will end and they will begin receiving bills. However, understanding the type(s) of loans you have, repayment options, and how to avoid lender scams, can help you build a successful repayment plan.
Federal vs. Private Loans
For most students, there are only two types of student loans available: federal and private. Federal loans are funded directly by the government, while private loans are from an individual lender, such as a credit union or bank. There’s no right or wrong choice when choosing. However, there are defined variances in picking the best repayment option for your individual needs. This is especially true when you see the loan delinquency rate falling to 11.2%. If possible federal loans are most likely the best choice. They allow better benefits and tend to be more flexible in payment plans. Also, Congress sets the interest rates for these loans each year. Don't worry it will not increase over time - the interest on federal loans is locked in for the life of your loan. Only after you've exceeded the maximum amount of federal loans you can take on should you turn to private loans. Private loans, although not as desirable as federal loans, can be real support for students who need more assistance. However, unlike federal loans, taking out a private loan requires an application process. Lenders will be looking for borrowers with decent credit and enough cash to make payments. While most students may not meet these requirements, finding a co-signer will most likely help you qualify for a private loan.
Forbearance or Deferment
Besides determining what kind of loan you have, understanding forbearance and deferment are two options to stay in good standing with your loans, even if you're struggling to pay them. There are several requirements to be aware of before taking advantage of these programs. For example, when taking a deferment, you’re agreeing to temporarily freeze your student loan payments. Deferments can be used on federal loans and select private loans when you’re continuing your education, i.e. grad school or beyond, while you’re actively serving in the military, participating in the Peace Corps, or becoming an AmeriCorps Vista. This is often done for an extended amount of time and depending on the type of loan(s) you have, you may not have to pay the accruing interest during the deferment. Similar to deferment, forbearance is a period of time in which your student loans are temporarily paused. However, forbearance is done for a limited number of months. Forbearance for federal and private loans can be requested if you’re experiencing unemployment, in medical or dental residency, or suffering from a medical emergency. Keep in mind, private lenders don’t have to agree to forbearance for any reason, and during forbearance, you’ll be responsible for paying back any accrued interest.
If you haven't already, you'll probably start noticing companies promising they can assist in consolidating your loans, or even better, qualify you for loan forgiveness. Don't let scam companies fool you, and don't sign up for anything before doing your research. Scam companies will charge you for services already available through free federal programs. Don't allow yourself to fall into a trap. Nerd's Wallet Student Watch List is a great resource to start determining if a company is legit or not. A few of the warning signs are: they'll pressure you to sign quickly, they'll make promises of instant student loan forgiveness, and they'll charge you upfront or have monthly fees. For more details, the Consumer Financial Protection Bureau thoroughly discusses the warning signs about fraudulent "student loan debt relief" companies.
Student loans are not an easy task to conquer and while at times they can feel overwhelming, you are not alone. Millions of individuals are faced with incorporating student loans into their monthly expenses, and surely you can all think of one friend or family member struggling with student loans. As with any financial obstacle, the key to success is doing your research and finding the best solution for your personal needs.