8 Things Everyone Should Know About Student Loans
First, the good news. The class of 2017 graduated into one of the best job markets in recent memory. Hiring is up 23%, a survey of 4,350 employers by Michigan State University found. And employers plan to boost starting salaries by 4% compared to last year.
Now, the bad news. The average amount of student loan debt for a 2016 graduate is more than $37,000, according to Student Loan Hero. That’s up 6% from 2015. And roughly 70% of newly minted graduates borrowed to pay for college. That means there are a lot of people staring down a pretty substantial debt as they’re trying to get their feet in the working world.
Almost everyone agrees those high levels of debt are a big problem. Although an undergraduate degree is a prerequisite for many jobs these days, burdensome debt means the youngest generation of workers often struggles to pay of their loans, even if they do land a decent job. Over 40% of borrowers are either behind on their payments, in default, or are putting off paying their loans because of financial hardship, the Wall Street Journal reported.
Once the excitement of graduation wears off, many recent grads are going to take a look at their student loan paperwork and wonder, “Now what?” And it’s no wonder they might be confused. Student loans might be their first introduction to the world of “grown-up” finances.
To help navigate the transition from college student to responsible adult, we’ve pulled together eight essential facts all borrowers should know about their student loans.
1. You can save money by signing up for direct debit
Not only is signing up to make automatic student loan payments directly from your bank account convenient, but it also can save you money. You’ll shave 0.25% off your interest rate when you sign up for direct debit for your federal student loans.
2. Consolidating your debt could make your life easier
Bundling all your student loan debt into one single monthly payment can make it easier to manage and save you money. For one, consolidating might allow you to lock in a lower interest rate. You’ll also streamline payments, which reduces the risk of missing a bill and getting hit with a late fee. Consolidated federal loans also come with many repayment options, such as income-based repayment.
Consolidation does have some drawbacks. Any special perks on an old loan, such as flexible repayment plans or bonuses for paying on time, will disappear. And if you opt for an extended repayment plan, you might end up paying more in the long run. Also, you can’t combine federal students loans and private student loans into a single consolidated loan. They must be kept separate.
3. Your job might come with loan forgiveness
If you have a career in public service, you might eventually qualify to have the balance of your debt wiped out. People who work full time for government and nonprofit organizations and make 120 on-time payments on their federal student loans will have the remaining balance of their loans forgiven. One catch: Private student loans aren’t eligible for forgiveness under this program.
4. You don’t have to start payments right away
You get a six-month grace period after you graduate before you have to start repaying your federal student loan. Perkins Loans come with a nine-month grace period. Other loans also might come with a time gap before you need to start paying them back. You should contact your lender to find out when you need to begin repayment.
5. You can probably get a tax break
There’s not a lot of good news when it comes to paying back student loans, but borrowers in repayment do have one thing to smile about. The federal government allows you to deduct the interest you pay on your qualified student loan (usually, any loan you took out to pay for school or educational expenses) on your income taxes. You can claim the deduction even if you don’t itemize, though you can’t earn more than $80,000 per year if you’re single ($160,000 if you’re married, filing jointly).
6. Not paying your loans can have serious consequences
Student loans are serious business, and it’s important to make your payments on time, every month. Not only will paying late mean extra fees and interest, but if you ghost on your loan payments, you’ll pay an even steeper price. Eventually, late payments will be reported to the credit bureaus, which will lower your credit score and make it harder to get other loans.
Once you fail to make payments for 270 days, your debt goes into default. At that point, the government can garnish your wages and tax refunds to recover its money. Plus, you’ll lose access to programs that can help you pay your debt, such as forbearance and deferment. And you won’t be eligible for federal student aid in the future.
7. If you can’t make your payments, you have options
If you do end up having trouble making your student loan payments on time every month, you might be able to get help. Federal student loans come with different repayment options, such as extended and income-contingent plans, that allow you to better match your monthly payment to your budget. Be aware, though, any plan that lowers you monthly payment also means you’ll probably end up paying more in interest over the long term.
People who are temporarily unable to make payments because of a job loss might qualify for a forbearance, which temporarily halts your payments while you get back on your feet. Interest continues to accrue while your loans are in forbearance, which is not ideal. But it’s a better option than simply not paying the bill, which can eventually lead to wage garnishments and trashed credit.
8. Private loans are a whole different ballgame
Most of the information here applies to federal student loans, such as a Perkins Loan or a Direct Subsidized Loan. If you have private student loans through a bank or credit union, you might have different repayment options, might not be able to put off payments if you’re struggling financially, and won’t be eligible for programs, such as public service loan forgiveness.
Also, unlike federal student loans, private student loans aren’t always discharged after the borrower’s death. That means if you pass away, your lender might come after your parents or spouse for the remaining loan balance. If you have any questions about paying your private student loan, you should contact your lender directly.