Managing your Student Loans

Student loan debt is quickly becoming the fastest-growing epidemic in American economics. The national student loan debt totals $1.3 trillion, grows at a rate of $3,000 per second, and shows no signs of slowing. Student loans are unwieldy, issued at interest rates that should be confined to Orwellian satire, and are one of the only forms of personal debt that cannot be discharged in a Chapter 13 bankruptcy. Even aside from seemingly endless monthly payments that can consume a sizeable portion of a recent graduate’s salary, student loans can plague a borrower’s credit score for years after they graduate. So, in a culture where an increasing emphasis on postsecondary education makes student loans seem like a necessary evil, what can a prospective student do to avoid being swallowed by their debts?

As is often the case, the first step in managing student loan debt is to do your research. An estimated 65% of high-debt student loan borrowers don’t understand the terms of their loans, leaving them susceptible to massive interest accruals and nightmarish credit spirals. In fact, according to a 2015 Government Accountability Office report, about 70% of those who have defaulted on their federal student loans had incomes low enough to qualify for an income-driven repayment plan. Almost all federal loans are eligible to qualify for these plans, which can reduce initial payments, ease the burden of interest, or even forgive all outstanding debt after a certain period of time. For those not already versed in the intricacies of loan debt, though, it can be hard to find a plan to fit their needs. Thankfully, in a field where a lack of knowledge can be dangerously expensive, there are a few simple tips to keep in mind when deciding how to deal with student loans.

Whenever possible, it is better to take out a federal loan than a private loan. Federal loans have fixed interest rates around 3.76%, are eligible for interest subsidies, and can qualify for any one of many repayment plans. Private loans, on the other hand, have variable interest rates averaging 9-12%, which can potentially increase over the life of the loan. Private debtors have no obligation to offer repayment plans, and often require payments to start immediately after the loan is signed. Essentially, private loans are more expensive, less forgiving, and completely unsubsidized.

Once you have student loans, the next step is to consider consolidation. Consolidating multiple federal loans into one loan agreement can simplify the repayment schedule, lower monthly payments by extending the repayment period, and qualify loans for new payment plans. Consolidation also often allows variable interest rate federal loans to be combined into a fixed rate agreement. This may seem fantastic, but there are some downsides. While an extended repayment plan may ease the immediate financial burden, it will likely increase total interest payments over the life of the loan. You may also lose any discounts or benefits associated with the original loans, which could have potentially saved thousands of dollars. Consolidation is also permanent, so if you are only seeking short-term relief in a time of financial trouble, deferment or forbearance may be better options. Finally, under no circumstances should private and federal loans ever be consolidated; since private loans cannot be federally subsidized, the consolidated loan will be ineligible as well.

The last point to consider is whether or not to make prepayments on a student loan in times of financial surplus. Following the Higher Education Opportunity Act of 2008, it became illegal to charge any sort of penalty on the prepayment of a federal loan. It also established that any borrower has the right to make a prepayment against their outstanding principal, rather than simply making an early payment for the following month. This means they can make a payment on the principal of a loan, reducing the amount of interest accrued, with no immediate drawback. Of course, it isn’t always that simple. While it is usually a good idea to make a prepayment in times of true excess, making an early payment with money that is then needed for other expenses can be disastrous. In a worst-case scenario, hastily prepaying an existing loan can force a borrower to take out another loan in order to pay for other expenses.

In the world of student loans, one misstep can have serious financial consequences for years to come. Without proper debt management techniques and an adequate understanding of its terms, even the smallest student loan can grow into an unmanageable beast. However, with the right mindset, thorough research, and a willingness to make sacrifices, that beast can be tamed.