If you are overwhelmed by new student loan debt, you are not alone. According to a recent report, 71% of the class of 2012, or 1.3 million of the year’s college graduates, funded their education with federal or private loans. The average amount of debt per student was $29,400, up 25% from $23,450 in 2008.1 To put this into perspective, the average starting annual salary for new graduates in 2012 was $44,500. 2
Paying off these loans is often a challenge for graduates. Beyond the burden of an approximate $340 per month payment, assuming a ten-year repayment schedule, the high level of debt can derail long- and short-term financial goals. A study by the organization Young Invincibles found that 15% of recent college graduates who had student loan debt were denied a mortgage and 21% were denied an automobile loan. Further, 47% stated that they postponed buying a house, 35% postponed starting a family, and a staggering 76% were limited in the amount they could save for the future. 3
Strategies to Start the Repayment Process
Repaying student loan debt does not have to be onerous. Long-held budgeting strategies such as managing everyday expenses and limiting purchases by credit card can be effective means to finding the cash to put toward student loan payments. Additionally, borrowers have other options depending upon the type of loan they hold.
Graduates who took out federal loans--which represented 80% of total student debt dollars in 20124--have myriad options and protections at their disposal. Among these are the following:
- Standard repayment, whereby loans are repaid in equal amounts over a pre-stated period, generally 10 years. This is typically the default plan if another option is not selected.
- Graduated repayments, which start out lower than the standard option and increase gradually so that the loan can be paid off in 10 years.
- Income-based repayment, which is available to borrowers who can demonstrate a partial financial hardship. Typically, repayments are capped at 15% of income and repayments can extend to 25 years.
- Income-contingent repayment, which also requires a partial financial hardship, and repayment amounts are a function of adjusted gross income, family size and discretionary income.
Graduates who used a private lender may consider negotiating a lower interest rate. However, research shows that only one in four borrowers who ask for a lower rate is successful in obtaining it. 5
What if I Default?
There can be serious consequences should a borrower decide to not repay, or stop repaying, a student loan. Defaulting on a student loan can result in low credit scores that can affect the ability to obtain a future loan or employment. More significantly, student loan debt might not be forgiven in bankruptcy proceedings under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Borrowers who have difficulty repaying a loan may look into some of the hardship-based repayment programs described above. Additionally, the Public Service Loan Forgiveness program might apply to individuals who work in certain industries, including public education, law enforcement or non-profit organizations.
However, some loans contain a provision that will put the loan in automatic default if a co-signer dies or files for bankruptcy. When this is triggered, borrowers must pay the entire loan balance to avoid default. Staying on top of the particulars of your loan agreement is, therefore, imperative.
If you are facing a mountain of student debt, let me help you sort out your options and plan for the future.
1The Institute of College Access & Success, “Student Debt and the Class of 2012,” December 2013.
2National Association of Colleges and Employers, “2014 Salary Survey,” April 2014.
3Young Invincibles, “Borrower in Distress: A Survey on the Impact of Private Student Loan Debt,” May 2013.
4The Institute of College Access & Success, “Quick Facts About Student Debt,” March 2014.
5Young Invincibles. Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.
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