College Debt

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Financial aid: bane or boon?

There is no second guessing the fact that financial assistance, both from federal and private sources, plays an instrumental role in sending many American students to college. A majority of prospective college students apply and receive some sort of financial assistance in the form of grants and loans. While grants are gifts, loans need to be repaid with interest.

Two-thirds of students graduating from college are in debt. In 2013, The Institute for College Access and Success (TICAS) predicted that average borrower was graduating with a college debt of $26,600.

Average graduate student loan debt numbers are at $57,600; the college debt statistics for average graduating law school students is startling however. According to the New America Education Policy Program, in 2012, median debt loads for law school graduates stood at $140,000. However, the total federal student loan debt dwarfs all these statistics; according to the Consumer Financial Protection Bureau, in 2013, debt statistics surpassed $1 Trillion.  The alarming situation begs the question, how to pay off college debt because default is not an option since it would ruin the borrower’s credit history, stopping him/her from buying a house, car or taking out loan for business etc.

How to pay off college debt?

The following are some of the strategies that have worked for borrowers of student loans.

  • Know your debt – If a borrower has multiple loans then he/she needs to prioritize. Loans with high interest rates should take priority over others. Paying off loans with higher interest rates will save borrowers money in the long run.
  • Refinancing – Refinancing is a way to lower interest rates. There are lenders in the market who may be willing to refinance student loans. However, they will charge their own service fee; therefore it is imperative that a borrower adds that amount in his/her decision.
  • Be wise and do not deplete your savings – Paying off student loans early may be the right strategy but it’s not worth at the expense of depleting your emergency or retirement funds.  It is advised that a borrower keeps three months worth of living expenses in an emergency fund.
  • Be Frugal – Saving money is the way to paying off early student loan debt. Graduates have lived with their parents, and paid more than the minimum due amount each month to get out of the debt trap.
  • Earn more – Borrowers have used their bonuses and commissions to pay off student loans faster than their peers. Others have taken on additional jobs or freelance work online to earn more, so that more could be paid back to the lenders.

Alternative strategies to managing student loan debt

Student loan debt consolidation is a way to efficiently manage student loans. Many avail this option for two primary reasons: one to simplify their finances and second, to lower their monthly payments.  While consolidation would lower the monthly payments, a borrower ends up paying more in interest costs, since his/her pay off period is extended in consolidation. Plus, federal student loans cannot be consolidated with private loans. All in all, financial benefits to consolidating federal loans are negligible except that a borrower makes one single monthly payment and may have access to alternative repayment plans. However, if you foresee financial hardship or cannot make good on your loan repayments presently, loan consolidation remains a good option for you.

Deferment and Forbearance

These are temporary options, ideally suitable for those who are on the verge of default. Under deferment or forbearance, eligible borrowers are allowed to temporarily reduce or postpone their federal student loan payments.

Deferment is essentially a time period granted by the federal government during which a borrower does not make payments on his/her:

If a borrower does not qualify for deferment, he/she may ask the loan servicer for forbearance. With forbearance, a borrower either does not:

  • Make payments for up to 12 months, or
  • Reduce his/her monthly payments for up to 12 months

College debt forgiveness or the federal government’s Public Service Loan Forgiveness (PSLF) Program encourages college graduates to enter the public service sector and work full-time. The PSLF Program, however, does not promise 100% loan write-off. Eligible borrowers may qualify for forgiveness of the remaining balance of their Direct Loans after making 120 on time, full, scheduled, monthly payments.

Teacher Loan Forgiveness

Another option is teacher loan forgiveness. This is the federal government’s student loan forgiveness program for teachers who have accomplished the following:

  • Taught full-time for 5 complete and consecutive academic years
  • In certain elementary and secondary schools that serve low-income families, and
  • Meet other qualifications

They may qualify for student loans forgiveness of up to $17,500 on:

  • Subsidized and unsubsidized Federal Stafford Loans
  • Direct Subsidized and Unsubsidized Loans

Total and Permanent Disability (TPD) Discharge

Borrowers with physical or mental impairment which precludes them from engaging in any gainful activity may apply for the discharge. Federal Perkins Loan, Federal Family Education Loan, and Federal Direct Loan may be forgiven under this program.