Currently, 44 million Americans hold over $1.5 trillion in debt and over 40% of borrowers have defaulted on their loans. Managing student loan debt has been a struggle for many and some policymakers are beginning to view it as a crisis.
In order to get out of the crisis, it’s important to first understand how we got here. Contrary to popular opinion, the rising student loan debt crisis in the United States is not solely due to individuals’ poor financial habits. It is also a result of a system that has mortgaged its future to benefit a small few.
Over the last twenty years, tuition has steadily risen. At some universities, this rise has been over 200%. Generally speaking, the rate of tuition has risen eight times faster than wages, according to the Federal Reserve of St. Louis. For those that are currently considering higher education but lacking funds, enrolling in community college to save on costs may be an option worth considering.
Additionally, consumer protection regulations have slowly been removed from student loan debt. These regulations include truth-in-lending and bankruptcy protection. Without these protections, tuition has been able to increase at hyperinflationary rates and has contributed to the current default levels.
It is imperative to review the fine print of student loan documents and ensure that the lender is accurately calculating the balance totals each month. If borrowers are unsure or uncomfortable analyzing this themselves, there are financial counselors that will be happy to provide expert guidance. Many financial wellness programs offer free access to certified financial counselors to assist borrowers through tough financial conversations and decisions.
Understanding these systemic issues surrounding student loan debt helps borrowers better grasp how the financial system works. By understanding the system, borrowers will be better equipped with the knowledge, and confidence, they need to ask qualifying questions when assessing their student loan balances. But that only provides a baseline. Here are some options for building an effective repayment plan.
Consolidation combines several student loans into one larger loan under a single lender. This option is available for most federal student loans including Stafford, PLUS, Perkins and Direct loans.
In order to consolidate federal loans, individuals will work through the Department of Education. The government will pay off the loans and replace them with a direct consolidation loan.
Some lenders also offer consolidation for private student loans. Once the loans are consolidated, the interest rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent. This new interest rate should be fixed for life. If it is not, negotiate for it to be a fixed rate. And the consolidation process should be free. If a service provider requires a fee, borrowers should assess different lenders. To begin the consolidation process for federal loans, visit studentloans.gov. Keep in mind that consolidating student loans will likely not reduce the debt amount but it will make it easier to manage.
Some companies like Hulu and PwC are now offering student loan repayment programs to employees. These programs either match the monthly payment or offer repayment benefits regardless of how much is paid each month.
There are many employers that now offer student loan debt services through employee benefits, such as a financial wellness program like FinFit. HR departments will be happy to discuss and explain the available benefits to employees.
Refinancing is similar to consolidation in that the loans are paid off and replaced with a new loan. The difference is that this new loan is refinanced at a lower interest rate, saving the borrower money in the long run. There are qualifications that must be met in order to be able to refinance. These can include elements like a steady income, good credit score, and/or a co-signer.
There are some common myths when it comes to repaying student loan debt. One said myth is regarding the student loan forgiveness program. This program was created for citizens devoted to public service. Typically, these jobs do not have a high salary but do require higher education. In theory, an individual who graduated with student loan debt could work in public service for ten years and if they made their monthly payments on time for the entire ten years, the remaining balance of their student loans would be forgiven.
Unfortunately, 99% of individuals who enrolled in the forgiveness program were denied at their 10-year mark due to a technicality. Senators across the nation suspect fraud and are calling for an investigation. Until this is sorted out, do not expect student loans to be forgiven.
Another commonly misunderstood program is an Income-based Repayment Plan (IBR). Should individuals encounter financial challenges and cash is tight, borrowers have the option to reduce monthly student loan payments by enrolling in an IBR plan. However, once the borrower’s income increases and the IBR status is removed, the lender often applies interest capitalization causing the balance to balloon. This is something to watch out for prior to enrolling in this type of repayment plan.
With varying options when it comes to student loan repayment, an effective plan begins with the end goal in mind. The borrower should set a desired payoff date. With this date established, the next step is to reverse engineer the repayment plan to determine how much should be paid each month in order to achieve this goal.
Once the borrower has determined how much they will pay each month, it is recommended to check on the student loan status on a monthly basis to ensure that the payments are being applied to the principal. Otherwise, the lender may only be applying the payment to the interest, which means it will take longer to pay off the loan.
Student loan repayment can be accomplished, but due diligence is required by the borrower upfront and during the repayment plan to ensure proper follow-through.