When it comes to having massive amounts of debt, student loans are one of the biggest culprits, especially now that student loan debt has surpassed credit card debt in America. So what can you do if you find that you’re sitting under a mountain of student loan debt?
Here are a few suggestions to help you dig your way out:
1. Get a clear understanding of your student loan “big picture”
The most important number, of course, is the total debt that you owe. Beyond that, though, you need to understand which type of loans you actually have. There are generally three main types of student loans:
Direct Government Loans: These are ones you borrow from the Federal government itself, and they tend to have lower interest rates than private loans. They also are sometimes subsidized, which means that government pays your interest as long as you remain in school or in a grace period.
Government-Backed Loans: Since June 30, 2010, these loans are no longer being issued. But many borrowers still carry these. Like private loans, these loans are borrowed from a private company, however unlike private loans they are backed by the federal government. Which means if you default the government will reimburse the lender. (Because of that guarantee, these loans have lower interest rates than private loans)
Private Loans: Loans borrowed from any private lender without government backing.
To find out which of these types of student loans you have, try using the National Student Loan Database, which has information on all loans. You should be able to log-in and find your loans, with information about what type of loans they are.
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If you have federal student loans (and most student loan borrowers do), then you need to be aware of some crucial government programs that can help you out. One is called the Public Service Loan Forgiveness Program, and anyone who works in a qualifying government or non-profit job is eligible to apply. Under this program, if you make payments for 10 years you can have the remainder of your student loan balance forgiven. Yes, that’s right — you only need to make payments for 10 years and then it’s gone, no matter what.
Another program that helps many student loan borrowers is called the Income Based Repayment program. What this does is allows you to pay lower monthly payments based upon your net income. Usually, if you are accepted into the Income-Based Repayment plan, your payments will not be higher than 15% of your disposable income each month.
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3. Make a plan to pay off your entire student loan debt
The absolute key to paying off your student loans is to make a realistic and concrete plan for how you will pay them off, month by month. In order to do this, first decide how much money you can allocate each month to your student loan payments. This number will be different for each person, but it’s important that you settle on a number that makes sense for you.
If you pick a number that’s too low, then it will take you longer to pay off your loans. But if you pick a number that is too high, you won’t be able to stick with your plan. So think about it carefully, and use your budget to determine what makes sense.
Once you have that number, decide how you need to divvy up the money to pay each of your student loan payments per month. Of course, you have to pay the minimum payments, but beyond that you should usually pay any extra money toward the loan with the highest interest payment. (There are some simple web apps that can help you do this)
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4. Don’t ignore the problem, even if you can’t pay
The worst thing you can possibly do with regard to your student loans is simply ignore them and not make any payments. You need to understand what happens if you don’t pay your student loans. Why? Because if your lender doesn’t receive any payments from you, as specified in the terms of your loan, they will first declare you delinquent and then after about 270 days they’ll consider you to be in default on the loans.
Once you’re in default, a lot of things happen — none of which are good for you. For one thing, your loans become due and payable immediately. So instead of owing a monthly amount, you owe the entire balance. And your credit score will take a big hit, not to mention you could have your federal and state tax refunds withheld.
For another thing, if you have federal loans in default, the government can sometimes garnish your wages because of your student loan status. And nobody wants to have their wages garnished.
Hopefully with all the tips provided here you’ll never get to the point where you can’t pay your student loans. If you stay diligent, inform yourself, and keep making payments every month, you will become debt free — and probably faster than you realize. Good luck!
Image: Andrew Allingham, via Flickr