Millennials, Gain Control of Your Student Debt Before It's Too Late
Millennials: Get Your Student Debt Under Control Before It's Too Late
Now that you have graduated and gotten your degree, those student loans are starting to crop up in your mind. Surely, you’ve received a few reminders about your payments that will soon be due. Despite that, they may not be a big concern yet.
It’s easy to forget about student loans. While students are in school, payments are put on a deferred status, so you don’t have to worry about them until after graduation. On top of that, there is a grace period that students advantage of after graduation, perpetuating the deferment period for six months.
After all that leeway, you’ll be required to make your first payments. Hopefully by that time, you’ll be on your feet and able to handle your debt, but some people might not have everything under control. Here are a few tips if you’re in that boat!
Don’t Fall Behind on Student Loan Payments
Falling behind on student loan payments is extremely detrimental to your financial future. For many people, student loans are their first experience with debt, so falling behind is a bad way to start building credit. Getting a good grip on these student loan payments early on is really important.
The good news is that staying on top of your student loans doesn’t have to be difficult. If you can’t handle standard repayment, then you have options that allow you to restructure your payments. Your student loan servicer should be able to explain your options with student debt, too. If you can’t get what you need from your servicer, then you can certainly find the right advice online where there are countless resources available.
Is an Income-Driven Repayment Plan Right for You?
Many student debtors choose an income-driven repayment plan when they are figuring out a path forward. The theory behind these plans is fairly simply. They cap your monthly payments at a percentage of your discretionary income, freeing up cash on a month-to-month basis. There are four plans available: the income-driven, income-contingent, PAYE, and REPAYE plans. Depending on the plan, the monthly payment cap ranges from 10, 15, to 20 percent of your income; repayment terms range from 20 to 25 years.
If you have a low income, then one of these plans might be perfect for you, especially if you’re struggling with the standard 10-year repayment plan. Keep in mind however, these plans don’t eliminate student debt quickly given their low payment cap; in fact, it’s entirely possible to pay more over 20 years at lower monthly payments than to have just dealt with the 10-year plan.
With that in mind, if you have a high income, then an income-driven repayment program is most likely not worth it. As mentioned, if you can handle the 10-year standard plan, then you should which is more likely to happen with greater income.
Should You Consider Student Loan Refinancing?
While some people consider student loan consolidation through the federal consolidation loan program, it doesn’t actually save any money in the long run. Alternatively, student loan refinancing with a private lender offers similar benefits, but it also offers an opportunity to save money in the long run.
When you refinancing with a private lender, you consolidate all of your loans together and acquire a new repayment term for the new loan. If you refinance successfully, then you can reduce the overall interest rate on your loans with that one new loan. If you have a lower interest rate, then you stand to save money over the repayment term.
With that in mind, the refinancing option seems like a no-brainer. It isn’t that easy. You need to qualify under certain underwriting criteria which depends on the lender involved. Oftentimes, you’ll need to have an established income as well as solid credit history in order to qualify which isn’t as common among new Millennial graduates.
Also, when you opt for student loan refinancing, it also means forgoing some of the perks that are offered by the federal government on federal student loans. This includes forbearance, deferment for economic hardship, and other benefits that help out in times of need. You can also count out student loan forgiveness.
What Happens if Your Loans go into Default?
While there are so many options for handling your student loans, bad things can still happen. There is always the potential to default no matter how low your interest rate or payments are. Falling into default shows up on your credit report, and it negatively affects your credit history, helping block any financial moves in the future. If this happens, you still have options.
For federal student loans in default, the government offers rehabilitation programs. Most of them involve establishing a new payment schedule that requires ten consecutive payments of a pre-determined value. If you can make these payments, then the negative mark on your credit history is removed, and your loans are taken out of default status. The problem isn’t solved though because you still have your loan to pay off! This is just a way to recover and get the ball rolling again.