Getting a Handle on Your Student Loans

As education costs rise, student loans are increasing in numbers and dollars borrowed. Smart loan management can protect your credit score and save you money.

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by NEA Member Benefits

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Key takeaways

  • Understanding the details of your student loan terms and repayment options puts you in control of your debt.
  • There are many repayment options for federal loans, allowing you to tailor a plan that works for you.
  • Private loans have less flexibility but lenders may offer incentives that can reduce your monthly payments.

As of the fourth quarter of 2016, Americans owed a record $1.31 trillion in student loan debt, according to the New York Federal Reserve. It’s critical that you responsibly manage student loan debt, along with your other household expenses, to stay in control of your finances.

Come to terms with your loan terms

If you’re among the 44.2 million people carrying student loan debt, it’s important to structure payments to avoid falling behind or worse, defaulting on your loan. Get up to speed on the following topics so you’re prepared for any scenario:

  • Your loan balance and terms. Keep track of how much you owe, the interest rate you’re paying, and the repayment terms.
  • Options if you start struggling. Depending on the type of loan you have, you may be able to restructure your loan to lower your monthly payments and get them to fit into your overall financial budget.
  • What happens if you miss payments. Like any other loan, missing payments will ding your credit rating. Defaulting is even worse. The debt will always be with you since student loans cannot be discharged in bankruptcy.

Pick the federal loan repayment option that works for you

For federal loans, there are several repayment options depending on the type of loan you have:

  • Standard Repayment Plan. Payments are fixed to ensure your loan is paid off within 10 years.
  • Graduated Repayment. Make smaller payments early on with the payment amount gradually increasing over 10 years. You’ll pay more than you would under the Standard Plan.
  • Extended repayment. Payments may be fixed or graduated to ensure your loan is paid off within 25 years. Monthly payments will be lower than the Standard or Graduated plans but you’ll pay more over the life of the loan.
  • Income-Based Repayment (IBR) or Income-Contingent Repayment (ICR). Monthly payments are either 10% or 15% of discretionary income but never more than you would have paid under the Standard Plan. Payments are recalculated annually. You must have high debts relative to income.
  • Pay As You Earn Repayment Plan (PAYE). Monthly payments are set at 10% of discretionary income but never more than you would have paid under the Standard Plan. Payments are recalculated annually. You must be a new borrower as of October 1, 2007 and must have received a disbursement of a Direct Loan on or after October 1, 2011, and have high debts relative to income.
  • Revised Pay As You Earn Repayment Plan (REPAYE). Monthly payments are set at 10% of discretionary income, recalculated annually.
  • Income-Sensitive Repayment Plan. Monthly payments are based on annual income so that your loan is paid off within 15 years. Payment formulas vary depending on the lender.

Keep in mind that other than the Standard Repayment Plan, the options above are designed to lower or manage your monthly payments. This will result in you paying more than you would under the Standard Plan, making your loan more expensive in the long run. Since federal loans do not have any prepayment penalties, consider accelerating payments as your income goes up to pay the loan off quicker and reduce the overall cost.

If you have a private student loan, there is less flexibility. Contact your lender and try to negotiate a restructure of the loan terms or a temporary lowering of monthly payments.

Avoid the dreaded default

You absolutely, positively don’t want to default on your student loan. Your credit rating would take a hit and you’d be liable for costs associated with trying to collect on your debt, making the total amount owed even greater.

If the repayment options above don’t solve the problem, here are two other options:

  • Deferment. Your lender allows you to stop making payments for a period of time. Interest continues to accrue so deferment adds to your debt but gives you time to work out a repayment solution while you catch your monthly payments breath.
  • Forgiveness, cancellation or discharge. These terms generally all mean the same thing but they are used in different ways for different reasons. See if you qualify for the Teacher Loan Forgiveness Program. You must have been teaching full-time for five consecutive years at an eligible low-income school and meet other loan-specific criteria.

Turn yourself into a responsible borrower

Student loans are helping many more people—especially women—get a college degree. But like all loans, they come with a lot of responsibility. The non-profit American Student Assistance offers links to myriad financial aid and financial wellness resources plus an overview of student loan repayment options. Another helpful website is Student Loan Hero, which offers free information on federal and private loans, plus calculators and helpful articles. Student Loan Hero also works with lenders to package loan consolidation products but you can use their educational resources at no charge.