The vast majority of my close friends are people that I met in college, which is probably why so many conversations over dinner or wine start out being about TV, boys, or jobs, but eventually turn into conversations about our crushing student loan debt and the grey and hopeless world our crushing debt forces us to live in. Okay, so maybe the severity of that last part depends on just how much wine has been passed around, but it’s bad out there, friends. College costs are skyrocketing, availability of grants is decreasing, and the astronomically high interest rates only dropped a few months ago.
The only real solution to paying off your loans without having them cost you a ton of interest, damage to your credit, and headaches, is to get a good job and pay them off fast. Most of us live in a world where if that happens for us at all, it won’t happen for years to come, so here is the information you need to keep your loans from getting on top of you and staying there forever.
1. Figure Out Where Your Loans Are Held
Federal Student Loans are held and managed by companies called “servicers” It’s very common for your loans to be held at more than one servicer. It’s less common, but entirely possible that the servicer that had them when you started school, doesn’t have them any more because they’ve transferred to a new company while you were learning to make ramen in your dorm room’s coffee pot. Look yourself up at nslds.ed.gov while you’re still in school. Figure out who services your loans and stay aware of how much debt you have.
2. Call Your Servicer!
Most people don’t call for help until it’s already too late, but a few proactive discussions can prevent a whole host of disasters. A little bit of paperwork or advice can stop you from getting your wages garnished, your tax refund withheld, and your credit score trashed. Your servicer will be able to explain how your loans, interest and options work. They can discuss lowering or postponing your payments, and can explain more complicated programs like Public Service Loan Forgiveness.
3. Pay Literally ANYTHING Toward Your Loan While You’re Still In School
If you are in school at least half time at a recognized institution, you qualify for an In School Enrollment Deferment, which means you don’t have to worry about loan payments on top of class, extracurriculars, internships, and partying.
But Stafford loans come in subsidized and unsubsidized varieties and interest is always accruing on those unsubsidized loans. That interest builds up everyday for four years of school, and then for six more months of grace period after you leave half-time status. At the end of your grace period, that interest capitalizes, which means interest is added onto your principle. The amount of your loan is now higher, and a higher principle costs you more interest every day. Making payment while still in school reduces the accrued interest on the unsubsidized loans, reducing or preventing the negative effects of capitalization.
For example: If you go to a four year school, and then have a six month grace period that’s 54 months where you owe no payments, but are accruing interest. If you pay five bucks a month, you’ve paid your debt down by $270. Ten dollars a month reduces your debt by $540. Twenty-five dollars a month frees you from paying $1350 dollars once you’re out in the real world.
And the less you owe when you leave school, the lower your monthly payment will be, freeing up money for fun stuff and making things like rent, insurance, and your phone bill less of a nightmare.
4. Don’t Consolidate Unless You Have Talked It Over With An Expert!
Once in a blue moon a special type of consolidation offer is made available, but outside these magical, infrequent windows there is only traditional consolidation. For most people, a traditional consolidation is a terrible idea. When a loan is consolidated, they take a weighted average of your interest rate and round it up an eighth of a percent. It can lower your payment, but only by extending your term. So if you consolidate you wind up with a higher principle, you accrue interest at a higher rate, and you pay for a longer term. This costs you more money in the long term.
Plus, 10 year repayment terms and 30 year repayment terms still have all the same postponement options, in the same amounts. So, relative to the term of the loan, you have fewer safety nets available on a consolidation loan. There are a few very specific times when a consolidation might benefit someone- and that someone needs to call their servicer for help.
5. Don’t Ignore Your Bill
Do not fear a student loan bill that you can’t pay. Unlike your car and house, there are options on student loans. The solution for practically everything is Income Based Repayment or Pay As You Earn (which are sort of the same program in a ‘all squares are rectangles, but not all rectangles are squares’ sort of way). IBR/PAYE can reduce a payment to as low at $0 dollars a month. You sign up one year at a time and it fluctuates with your income and family size. Even if you can’t pay much at first, you can avoid the curse of capitalized interest by renewing on time every year and attempting to pay down accrued interest when you are better equipped to do so. If you sign up for a total of 25 years in an Income Based Plan, or 20 years in a Pay As You Earn Plan the loan will be forgiven at the end, though anything you do have forgiven you will have to claim as income on the last year of your plan, so you still want to strive to pay something whenever you can.
If you are experiencing one of the very few things that IBR/PAYE won’t solve, there is also Unemployment Deferment and Economic Hardship Deferment. And if all else fails, or if you only need a month or two to figure stuff out, you can use forbearance, but be aware it should only be used as a short-term option.
6. Don’t Get Scammed
There is a new trend where super helpful business people will offer to do all the leg-work for an Income Based Plan or a Consolidation for you. These good Samaritans are charging you a modest fee of five hundred to eight hundred dollars.
It takes less than five minutes to sign up for Consolidation or Income Based Repayment online, and you can do it for the even more modest sum of absolutely nothing.
I really hope this article helps takes a burden off your shoulders, or at least your wallet, and if you have any more detailed questions, for the love of all that is holy, call your servicer.