Learn all About Student Loan Debt Consolidation & Your Other Options
The average college student graduates with more than $20,000 in student loan debt, but many carry much more. For students continuing on to professional or graduate school, or those who attend private schools, the tally can top $150,000.
Student loan debt repayment cannot be avoided through bankruptcy, except in rare circumstances, but there are several ways to take the sting out of the monthly bill. Below are some tips and tactics to pay off student loan debt.
Pre-Pay Student Loan Debt
If possible, repay some of your student debt before you graduate or your interest deferral period ends. Early payments for subsidized loans are applied to the principal, which reduces both your principal balance and the interest you pay over the life of the loan. Payments toward unsubsidized loans are first applied to accrued interest, but that can also reduce the life of the loan and save you money in the end.
Consolidate Student Loans to Create New Payment Options
Federal student loans issued before July 1, 2006 have variable rates, which means the interest rate resets annually on June 30. Federal loans issued after that date have a fixed interest rate.
If the current interest rate on your federal loan is variable, consolidate the loan to lock in a fixed rate. Consolidating fixed rate loans also has advantages, including the ease of a single monthly payment. Many lenders also offer bonuses for consolidation such as a rate reduction of .25 to 1% after a number of on-time payments, and possibly an additional .25 to .50% rate reduction for automatic payments.
In addition to the potential rate reduction of up to 1.5%, most consolidation loans include choice of repayment plans. Repayment plans determine your payments by dividing the principal plus total interest by the life of the loan. The amount of the payment depends on the plan you choose:
- Standard repayment: Equal payments for the life of the loan, usually ten years, and minimum payments are $50.
- Extended repayment: Equal payments over a longer term (up to 25 years), which reduces monthly payments but increases the total interest expense. Must have more than $30,000 in outstanding FFEL Program or Direct Loans.
- Graduated repayment: Lower payments at first, when your income is lower. Payments increase every two years until the loan is paid off. Payment term is 10 years.
- Income Based Repayment: Income Based Repayment (IBR) is a new repayment plan for the major types of federal student loans. Under IBR, the required monthly payment is capped at an amount that is intended to be affordable based on income and family size. You are eligible for IBR if the monthly repayment amount under IBR will be less than the monthly amount calculated under a 10-year standard repayment plan.
- Income Contingent Repayment: For federal Direct Loans. Monthly payment amounts are reset each year based on your annual gross income as reported on your US tax return.
- Income-Sensitive Repayment Plan: For FFEL Loans. The monthly loan payment is based on your annual income. As your income increases or decreases, so do your payments. The maximum repayment period is 10 years.
Before you consolidate, research various lenders until you find one that offers the best terms.
Some lenders offer a two- to nine-month grace period following your graduation. The grace period may include interest subsidies. To ensure you receive all the subsidies, ask your consolidation lender to accept your paperwork in time to receive the best rate, but delay processing until your grace period is about to expire.
Do Not Let Financial Hardship Lead to Financial Ruin
When money is tight or you experience a financial hardship, it is tempting to skip a payment, or stop paying altogether, but default penalties are severe. Instead, contact your lender as soon as you know you are in trouble and ask them for help choosing a different repayment plan or applying for a deferral or forbearance.
Student loan debt can feel overwhelming, but taking advantage of consolidation offers can help you get a handle on your payments, and reduce the number of bills you pay every month.