Deferment and Forbearance

stockvault-piggy-bank-with-pill-bottle127632 A theme of my posts has been to avoid student loan debt wherever possible. However, that advice isn’t very helpful for someone who already has a large amount of loans. Sometimes, there are situations where the normal methods will not help. This post is for the catastrophic situations, where someone has too large of a debt than they can feasibly pay.

For federal loans, there are two options known as deferment and forbearance that a person could take if their loan payments have become too much for them to pay.

The two most common ways a person could qualify for deferment is economic hardship or a period of unemployment or inability to find full-time employment. If you qualify for a deferment under these situations, you can have payment of principal and interest delayed for up to 3 years.

Under this delay, your principal and interest payments will be halted. For subsidized loans, the government will pay the interest on the loan during the delay, just as it does while you are still in school. For an unsubsidized loan, interest will still accrue but does not need to be paid until the deferment period is up.

If you don’t qualify for a deferment, you could request a forbearance from your loan provider. Under a deferment, your loan payments could be stopped or reduced for up to 12 months. The amount depends on your exact situation. There are two types of forbearance a person could do, discretionary and mandatory.

For discretionary forbearance, it is up to the loan servicer whether they will grant you the forbearance or not. You can submit a forbearance request for either of the two following reasons; financial hardship or illness.

For mandatory forbearance, the loan servicer will have to grant you the forbearance if you meet the requirements. The most common reason for a mandatory forbearance is if your minimum monthly payment for all of your student loans is equal to 20% or more of your total monthly gross income.

These two options are really best when you are faced with a catastrophic financial situation where making your student loan payments is not possible, such as unexpected medical bills. In the event that you lose your employment, you will have to consider whether to apply for a deferment or income-based repayment instead. The better option will be based on your personal situation.

If you have been paying attention, you will probably have noticed that both of these options are for federal loans only. Again, the availability of options like these are another reason why federal loans are much better than private loans. Private loans are not required by law to have special options such as these, and most do not offer any. However, many people who are faced with an overwhelming amount of debt have a large amount of private loans in addition to their federal loans. So, what can a person do in this situation?

The worst thing anyone can do is nothing. It may seem crazy, but some people will simply stop making payments on their private student loans if it is too much. This will only make things worse, as your private student loan will go into default as soon as you miss one payment. Give my post here a read to see the problems that default can cause.

If you find yourself in a situation where you cannot make the payments on your private loan, pick up the phone and call the loan provider. The loan company wants your money (well, technically their money back plus interest). If you stop paying the company will not get their money, and they will have to go through a lengthy collections process in order to recoup just some of the money they’re owed. Trust me, neither you nor your loan provider want to go to collections.

If you call your loan provider and tell them that you can’t meet your monthly payments, they will most likely work something out with you. This may be a reduction of your monthly payment, or a postponement of payments for a short time. Again, the exact arrangement you come to will depend on your specific situation and loan provider. Regardless of the arrangement you make with the company, it will be much better than if you had defaulted on the loan.

Remember, when face with a crisis the worst thing you can do is nothing. If you find yourself in dire financial straits, the above options can help you make it out alive. Student loans don’t have to be your death knell, even in tough times there is hope!

Refinancing

sealAnother concept that has picked up in recent years is refinancing your student loans. Refinancing is often confused with consolidation, which I covered in the last post, but is completely different.

In consolidation, your different student loans are combined to create a new loan. The interest rate is a weighted average of the interest rates of your loans, so in essence nothing with your loans has changed except you have one loan instead of many.

What happens with refinancing, is that you take out a new loan to repay your current student loans. You are essentially replacing your student loans with a new loan, one that hopefully has better terms than your old student loans.

Because in refinancing you are taking out a new loan, you must go through a private company, unlike loan consolidation which is done through the U.S. Department of Education. Since the loan will be through a private company, there are some very important factors that you should know about:

1. The interest rate is not standardized like federal loans. The interest rate you receive for your loan refinance will depend on a variety of factors, the two most important being your credit score and income.

2. While you can refinance federal loans, since you are refinancing with a private loan you will lose all of the benefits that come with federal loans; such as the variety of payment plans or the ability to consolidate.

3. All of the terms to your loan will be set by the private company, such as the repayment term, interest rate, and whether the interest rate is fixed or variable. It is extremely important to review your loan contract so that you do not get surprised by anything.

4. Many loan companies will charge you an upfront fee, which is generally 2% of the total loan.

So when is refinancing your student loans advantageous? If you have good credit and income, you may be able to get a lower interest rate than your current loans. With a lower interest rate you will save money over time, and/or you might have lower monthly payments. Thus, refinancing tends to benefit those who are already in a good financial position.

People who are struggling to make their loan payments often have poor credit and/or a low income, and thus it is much harder for them to secure a better interest rate through refinancing. If you are struggling to make loan payments, there are other options that can help you out (which I will cover in other posts).

Student loan refinancing has become a large marketplace in recent years. Because of this, many shady companies have jumped into the space, trying to scam struggling borrowers out of their money. While there are many legitimate refinancing companies out there, it is pertinent that you thoroughly research any company you are looking at to refinance, in order to make sure that you don’t get snared by any of the scam artists.

So when is refinancing your loans a good idea? Refinancing can be a very useful too if you have a lot of private student loans with high interest rates. Through refinancing, you can replace those loans with loans with lower interest rates. There are several calculators online where you can plug-in the info for your current student loans, and the proposed refinance, and get an estimate of how much money you save through refinancing. So if you can save money by refinancing your private loans, then do it!

As for federal loans, I would be much more hesitant about refinancing them. While you could potentially get a lower interest rate, you are sacrificing the many benefits and protections that come with student loans. Because of this, the decision to refinance your federal loans has to be weighed very carefully; it is not as clear-cut as refinancing private loans. All of these different points must be considered before making the decision to refinance your federal loans.

Loan Consolidation

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The world of student loans is very confusing, and it doesn’t help that there are so many different terms thrown around student loans. One such term is consolidation. I’ve received a few questions about loan consolidation. Generally, people have heard that consolidating your student loans is something they should do and they want to know more about what consolidation actually is. So let’s take a look at student loan consolidation and whether it is beneficial.

First off, consolidation is only for federal loans. Many people will talk about private student loan consolidation, but that is actually more akin to refinancing, which I will cover in a later post.

Student loan consolidation the act of combining your different student loans into one big loan. Think about it as literally taking your loans and smooshing them together. You now have one loan, with a balance equal to the total balance of all your different loans from before. You will also have a new interest rate for your loan, which is determined by calculating the weighted average interest rate of your previous loans. Let’s take a look at a hypothetical scenario to help ourselves understand this.

Say you have three loans. The information for the loans are as follows:

    Loan 1 – $10,000 balance with a 4% interest rate.
    Loan 2 – $6,000 balance with a 6% interest rate.
    Loan 3 – $2,000 balance with a 5% interest rate.

After consolidation of these 3 loans, you have a new loan with a balance of $18,000. To find the weighted average interest rate, you would divide each individual loan balance by the total amount of loans you are consolidating, and then multiply that number by the interest rate. Do that for all three loans, then add the numbers together to get your weighted average interest rate. In this example, the new interest rate would be 4.875%. If you do the calculation yourself, you might find that 4.86% is different than the number you got. What gives? Well, the new interest rate on a consolidated loan is always rounded up to the nearest 1/8th of a percent.

So now, instead of having 3 different loans with different interest rates, you have just 1 loan. If you’ve been paying attention so far, you have probably noticed that consolidating your loans doesn’t really do anything to help you save money. Your balance is still the same. And your interest rate is basically the same too. So why then do so many people consolidate their student loans?

The main benefit of consolidation is convenience. With only one loan to be repaid, it is easier to keep track of, and there is less chance of missing a payment. Some people might also benefit in that they find it less stressful to have just one loan, instead of many different loans, even though the total amount owed is the same.

There are some other benefits to consolidating your loans. With your new consolidated loan, you can have a 30 year repayment term, which can decrease your monthly payments. This can be helpful for some people, as it gives them a lower minimum payment, and more time to repay the loan. You might also have access to some different repayment plans that were unavailable before.

One other small advantage is that you can consolidate a defaulted loan and bring it out of default, but only if you agree to pay the new consolidated loan through an income-based or income-contingent repayment plan. If you don’t want to do this, you can make 3 on-time monthly payments to your defaulted loan, which will then allow you to consolidate your defaulted loan and bring it out of default.

But these benefits are not too many – while consolidation can look fancy, I would argue that it is not useful in most scenarios. The theme of this blog in regards to repaying your loans is to pay them back as fast as you can. Consolidation does not help you to pay back your loans any quicker, it only makes them easier to manage.

Also by consolidating, you lose an advantage I discussed in this post. When paying back your student loans, I suggested you use either the Snowball Method or the Highest Interest Rate Method. In order for these methods to work, you need to have multiple loans. The Snowball Method can give you a psychological boost as you knock off your loans one by one, and the Highest Interest Rate Method will save you money in the long run. Consolidation takes away this advantage, as you can no longer pick and choose what loan you will focus your extra payments on.

So, for most people, loan consolidation is something that can be ignored. If you have 10 different loans, and the stress from keeping tracking of all of them is keeping you up at night, then sure, maybe consolidation would be a good choice for you. For the rest of us, don’t get caught up in all the talk about “student loan tricks” like consolidation. Just keep your head down, pay as much to your loans each month as you can, and get debt-free as soon as you can!

The Different Payment Plans

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In my last post, I covered strategies for a person who has entered repayment on their student loans. There are actually several different payment plans for federal student loans, which I want to discuss today. Remember, these payment plans are available only for federal loans, not private loans. This is just another reason why federal loans are much better than private loans.

Let’s look at the first 3 repayment plans:

Standard Repayment. As mentioned in earlier posts, the standard repayment plan for federal loans is a 10 year repayment plan, with fixed equal monthly payments of at least $50. The monthly amounts are calculated so that after making 10 years of payments, your loan will be paid off entirely.

Graduated Repayment. Graduated repayment is also for 10 years, however, relative to standard repayment, your monthly payments start out lower and slowly increase (usually every two years). So, while your monthly payments will be less than those for standard repayment at first, towards the end of the loan your payments will be much higher than under standard repayment.

Extended Repayment. You can extend the repayment of your loans beyond 10 years under an extended repayment plan. Repayment can be extended up to 25 years, and can include either standard (fixed) payments or graduated (increasing) payments. In order to start an extended repayment plan, you must have an outstanding direct loan balance of at least $30,000. Extending the repayment of your loans will decrease your monthly payment amount, if you make only the minimum payment each month you will pay more over the course of the loan in interest than if you had used a standard 10 year repayment.

The Department of Education also offers repayment plans that tie your monthly payment amount to your income. These plans can be helpful as they help borrowers who are struggling to make their payments with their current income. Each year, the borrower has to re-certify with their current income, which will determine their monthly payments for the coming year. Thus, if income rises, the payments on the student loans will rise accordingly. However, the monthly payment for an income-based plan will never be greater than the monthly payment under a standard repayment plan.

Most of these income-based repayment plans also have a provision where if you make your monthly payments for a certain amount of time (usually 20 or 25 years) and still have an outstanding balance on your student loans, that balance will be forgiven. A caveat to this is that the forgiven amount of loans is taxable as income.

So which of these many payment options is the best? Well… it doesn’t matter. Looking at these different payment options, we can see that their purpose is to decrease the amount of your payments. However, as I discussed in the last post, your goal with paying back your loans should be to pay as much as possible each month so that you can pay off your loans faster and pay less in interest over time.

These alternative methods of payment do two things: decrease your monthly payments and increase the term of your loan. While you have the benefit of paying less per month, this gives more time for interest to accrue on the principal of your loans. So you’ll end up being in debt longer and paying more on that debt!

Romans 13:8 says “Owe nothing to anyone except to love one another…” That sounds like good advice to me! There are so many advantages to being debt-free, or at least removing the burden of student loans off your shoulders. For more discussion of this, I would refer you to my first post in this series. If you asked someone if they would rather be debt-free in 10 years or 20 years, I’m sure that they would say 10 years! And if you asked them that same question but with 5 years or 10 years, I bet that they would again pick the lower number.

That’s why I say the repayment plan doesn’t matter… paying off your student loans as quickly as possible is much more important and more beneficial than trying to pay the smallest amount per month.

Now, that’s not to say these repayment plans are useless. In fact, I think an income-based repayment plan can be extremely helpful in certain situations. Things happen in life, and say that you lose your job. The very next day you could file for income-based repayment. Think about it – the income that your payments is being calculated on is $0! So your monthly payments for the next year will be $0 (remember, you only have to re-certify once per year, not whenever your income changes).

Of course, while your monthly payments are $0, interest will continue to accrue on your loan. However, such a strategy can help to give you some breathing room in a time of financial crisis. The nice thing about income-based repayment is that you can still pay extra on your monthly payments. So, in a time of need you can file for income-based repayment, and when things are back in order you can ramp up the payments on your loans to get them paid off as quickly as possible. In this scenario, income-based repayment acts as the “ace up your sleeve”

When looking at student loan repayments, there are generally two schools of thought. There are those who try to make their student loan payments as small as possible, and those who try to pay off their loans as quickly as possible. As I have already stated, I am firmly in the camp of those who try to pay off their loans as quickly as possible. While these different types of repayment can offer relief in a time of financial crisis, I think by and large they can be ignored in favor of this repayment plan: Pay as much as you can as soon as you can so that you can be debt-free as quickly as possible!

The College Graduate or: How I Learned to Stop Worrying and Pay Back My Student Loans

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Congratulations. You’ve finally done it. You celebrate with your family and friends, showing off your degree. With college now behind you, you are excited to take your first step into the working world. Things get off to a slow start, as it take you a couple of months to find a job. It’s not a job doing exactly what you wanted, and it pays a little less than what you had hoped for, but it’s a job so you take it.

A few months later, the first bill for your student loans pops up in your inbox. Your minimum payment is $300 a month. Between loan payments, car payments, rent, utilities, food and gas you’re stuck living paycheck to paycheck, each month falling a little bit further behind. You start racking up credit card debt, as you can’t afford to pay off the full amount each month. Eventually you miss a loan payment, then a car payment, then rent. Your loans go into default, your car is repossessed, and you are evicted from your apartment.

Homeless, you wander the streets with nothing more than the clothes on your back and a deflated football that in your hallucinations you believe to be a dog named Snappy, scrounging for loose change so that you can buy some alcohol to forget the pain if for only a few moments. On a cold windy day, you sit on a bench with your dirt encrusted coat wrapped tightly around you. A gust of wind picks up Snappy, and blows him into the road. There, before your eyes, Snappy is crushed instantaneously by the tires of a passing car. You howl in pain as your only friend is now gone, leaving you alone. “Oh,” you weep, “oh, if only I had better managed my student loans!”

Now, that was a bit of an extreme example, but I wanted to test out my creative writing skills. So yeah, nothing like that is going to happen to you, but perhaps you might find yourself in a situation like the following:

A recent college graduate living paycheck to paycheck lies awake at night stressing over whether or not he will be able to pay his bills for the month.

A young married couple can’t go on a vacation with many of their close friends as they can’t afford the trip due to their loan payments.

An employee has to work at a soul-sucking company with an abusive boss, and is too afraid to leave because even being out of work for a couple of weeks might mean they will run out of money.

These are all much more realistic situations a person could face in their lives. Many people out there are really enslaved by their student loan debt. At the very least, student loan repayment is a major source of stress for people. This report put out by the Boston Fed showed that 57% of people with student loans are concerned about being unable to repay them. Why be enslaved to your debt? Why stress out about it?

That’s why I’m writing this blog. Hopefully, to help you learn about student loans, learn how to manage them, and ultimately how to be free from them. In the last 2 posts, I have covered the topic of student loans for someone just starting college, and for someone who is in the middle of college. In this post, I will be writing about the college graduate. A person who is working full-time, and making payments on their student loans. In other words, a person who has hit reality. It can be easy to forget about our loans when we don’t have to pay them back, but when we start getting those bills in the mail it is a whole different picture.

So, you need to start paying back your loans. How should you do this, and how can you do this the most effectively? And how can you pay back your loans so you’ll be debt-free the fastest? Well, it’s pretty simple

Step 1: Make the minimum payment on your loans each month. This one should be a no-brainer. In order to avoid having your loans go into default, you need to pay the minimum amount specified by your loan servicer each month. In this post, I discussed all of the bad stuff that happens if you default on your loans. So, in order to avoid default and everything that comes with it, the first step is to pay the minimum balance on each loan every month.

Step 2: Pay off your loans early. Paying off your loans early will save you money in the long-term, since there will be less time for interest to compound, and less principle for that interest to compound on. Not only will you save money by paying off your loans early, but it will also help you to be debt free faster.

The best way to pay off your loans as quickly as possible is take any money left over after your minimum pat on one loan, instead of spreading that extra across all of your loans.

There are two common methods used to determine which loan to prioritize payments on, which I will call the Snowball Method and the Highest Rate Method.

In the Snowball Method, any extra money above your minimum payments is put towards the loan with the lowest balance. For example, say you have three loans:

  • Loan 1 has a balance of $2,000 and an interest rate of 4.66% with a minimum monthly payment of $50.
  • Loan 2 has a balance of $8,000 and an interest rate of 7.53% with a minimum monthly payment of $100.
  • Loan 3 has a balance of $5,000 and an interest rate of 4.29% with a minimum monthly payment of $75.
  • After making a combined minimum monthly payment of $225, you have an extra $100 to put towards your loan payments. Since this is the Snowball Method, you would put that $100 towards Loan 1, which has the smallest balance. Once Loan 1 is paid off, any extra money would then go to Loan 3 (which would then have the smallest balance). Once Loan 3 is paid off, you can then put all extra money into the last remaining loan, Loan 2.

    This method is often preferred because it gives you a psychological advantage. In this method, you knock out the smallest loan quickly, then move up to the next largest loan, and so on. By focusing on the smaller loans first, you get the satisfaction of paying off a loan completely. It doesn’t matter that it may have only been a small loan, that feeling of accomplishment from wiping one whole loan off the list can keep you going in what seems like a neverending stream of loan repayments.

    I think you can better understand the appeal of the Snowball Method when you look at the other suggested method, which is the Highest Rate Method. As the name suggests, in this method you put any extra money towards the loan with the highest interest rate first. When that loan is completely paid back, you put the extra payments towards the loan with the next highest interest rate and so on.

    The advantage to this method is that you will end up saving the most money in the long run. Because you are focusing on the loans with the higher interest rates, you are giving that interest rate less principal to compound on, and less time to compound as well.

    So, if the Highest Rate Method will save you the most money, why would anyone choose the Snowball Method instead? Well, as I mentioned before, the Snowball Method will give you tangible results sooner, as it quickly knocks off your smaller loans. Applying the Highest Rate Method to our example, the first loan to be focused on would be Loan 2, which has a balance of $8,000. While putting your extra money towards that loan first will save you more money in the long run, it’s going to take a lot longer to pay off that loan.

    This is where we see the advantage to the Snowball Method. Instead of slugging through a huge loan first, you quickly knock off some smaller loans to get the ball rolling. Like making a snowman, you start small and keep on rolling until you’re debt free.

    Personally, I prefer the Highest Rate Method to the Snowball Method. But each person is different, so what is important is finding the method that will help you the most in paying off your loans. Are you the type who wants to start with the small milestones and work your way up to the big ones? Maybe the Snowball Method is better for you. Are you someone who doesn’t need any milestones along the way, and instead will be content knowing that they are saving a little extra money? Then perhaps you would fit into the Highest Rate Method.

    Whichever method you pick, the important thing is to stick with it. And this brings us to our final step.

    Step 3: Stick with it! So much of paying back your loans has to do with discipline, the discipline to keep your head down and send out those checks each month, no matter how hard it can seem. Your student loans aren’t going to go away magically on their own, and while it may seem daunting, you just need to keep on plugging away at your loans. Maybe you can make a chart of your loans, and watch the balance decrease very month to keep you going. Or maybe, you’re the type who just needs to set up the automatic payments and not think about your loans until they’re paid off. But you need to stick with your repayment plan; many people fall off the wagon and find themselves right back where they were at the start. Don’t let this be you!

    So, in conclusion, it’s pretty simple. There are 3 steps to paying back your loans and being free from that debt. In case you forgot already, those steps are:

    Step 1: Make all the minimum payments on your loans.
    Step 2: Choose either the Snowball or Highest Rate Method for your extra payments.
    Step 3: Stick with it!

    Follow these steps, and you will find yourself on the way to debt freedom!

    P.S. I wrote out the whole blog and realized I forgot to add one part in. I didn’t really want to go back and edit it in, so I threw it down here. When making extra payments to a loan, be sure to specify that you want that extra money to go towards the principal of the loan. Some loan companies will try to screw you by applying it to the interest, so make sure you instruct them to put that towards the principle. It’ll save you money that way.

    Student Loans in College

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    In this post, I want to cover some tips for the person who is currently in college. Someone who has completed a year or two of school and already carries student loan debt.

    My first set of advice would be the same as for incoming freshmen; apply for as many scholarships as you can. You have already been in college for a few years, but that doesn’t mean you can no longer receive scholarships. So, spend some time searching for and applying for scholarships. You might think, “I applied for some scholarships last year and didn’t get any, son what’s the point in applying for them now?” I have two answers to that objection; 1) Past performance does not necessarily predict future results, and 2) If you apply to more scholarships this year, you will increase your chance of being awarded some. Having a defeatist attitude towards scholarships (and student loans in general) will guarantee that you struggle in this area.

    The next point is the same as one I had written for those just starting out in college as well. This would be to not take out more student loans than you need. Maybe last year you took out the maximum amount allowed, and had a bunch of money left over. Maybe you then took that extra money and spent it frivolously, treating yourself to frequent meals out and buying a new computer. If you want to graduate college with as little student loan debt as possible, you will need to stop that. Instead, take out loans to cover just what you need, and nothing more.

    If you follow these two steps, you should be in a position where you don’t have to take out that much in loans. Or maybe, if you were very fortunate in your scholarships, don’t have to take out any loans at all. Now you are in a position where you have some flexibility, and could possible take some steps that will minimize the impact of your loans.

    One question I’ve been asked before is “I now have enough money to pay for my education, but I have some debt from student loans I took out earlier. Should I use the money to pay off those old loans and take out new loans, or should I use that money for my tuition and avoiding taking out new loans?” The answer to that question varies on your situation. A lot depends on what type of student loan you currently have, and the loans you are being offered. If you forgot what the different types of loans are, you can brush up on them in my post here. With this flexibility, you can remove some of your “bad” loans, and replace them with “not-so-bad” loans.

    For example, say you currently have $4,000 in private loans. As we’ve learned private loans are almost always a bad deal and inferior to federal loans due to higher interest rates and less protection. You have $4,000 in cash, and the opportunity to take out $4,000 in federal loans. The interest rate on your private loan is 7%, and the interest rate on the offered federal loan is $4.29%. If you were to pay off the private loan with the cash, and then borrow the federal loan, you will have essentially replaced a higher interest rate loan with a lower interest rate loan and saved yourself some money!

    Look for these opportunities to reduce your loan liability, or to replace your “bad” loans with loans that are more favorable to you. If you have private loans, see if there is a way you could replace them with federal loans. Or if you have unsubsidized loans, see if there is a way you can replace them with subsidized loans. Taking such actions can set you up to pay less on your loans in the long haul.

    However, the most effective way to reduce the costs of your loans is to reduce the amount of loans you will need to take. By cutting your spending and saving diligently, you could have more money to go towards tuition each year. And that means less loans needed to be taken out. Of course, as I mentioned first, looking for scholarships and grants can help greatly. I’ve talked to several people who gave up on looking for scholarships after their freshman year. Don’t do that! There could be a lot of free money out there that you are missing.

    You are getting close to graduation. Graduation creates a lot of change in your life, and leaving school to go into the working world can create some new stress. In this tumultuous and stressful time, wouldn’t it be nice to know that you don’t have to worry about excessive student loan debt? By following these steps, you can ensure that you graduate college with a manageable level of debt that won’t burden you as you enter adult life.

    Avoiding Student Loan Debt

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    When I was in high school and learning to drive, I was not allowed to hop right into a car and get on the road. First, I had to pass a test to receive my learner’s permit (the New York version of a temps). Why did I have to do this? Because the government wants to make sure you have a basic understanding of driving and the rules of the road before you hit the streets. In this same way, we covered a lot of information about student loans in previous posts. Now that we have a working knowledge of student loans, we too can hit the streets, and get into the good stuff. The next few posts will contain advice on what you can do to minimize the debt you would take on from student loans.

    I am going to begin with advice for the person who is just starting their college career. Someone who is still considering their options, trying to decide what school to go to and what degree to pursue. Obviously, since the person hasn’t started college yet, they have zero student loans. Wouldn’t it be nice if they could keep it that way, or at least graduate college with a very manageable amount of debt? Let’s look at some tips that can help a new college student avoid student loans.

    1. Choose Your School Wisely

    The school you go to will have a huge impact on your possible student loans, because all schools charge different amounts for tuition. As a rule of thumb, it is best to avoid private schools. Private schools are much more expensive than public schools. For the 2013-14 school year, the average annual cost for a private 4 year school was $31,231. The average annual cost for an in-state public school was $9,139. That is a gigantic difference! A degree from a private school may be more prestigious, but is it worth paying an additional $88,368 over the course of your enrollment? And that’s not counting any additional interest if you need to take out loans to pay for that tuition. For what it’s worth, no one has ever scoffed at me or turned me down because of my public school degree.

    Another option to consider is community college. If going to a public school is still going to require you to take out a hefty amount of loans, going to community college first and then transferring to a 4-year school can significantly lower the total cost of your education. The average annual cost of tuition at a public 2-year college is only $3,347. Hypothetically, going to a community college for a year to knock off your core classes before transferring to a 4-year school could save you $5,792!

    There are a lot of other factors to consider in picking a college than the cost. But it is an important factor, and one you need to think about.

    2. Choose Your Degree Wisely

    Uh oh… this is the part where I go off and make fun of liberal arts degrees, right? We’ve all heard the jokes before, so I’m not going to waste time by going into that. However, there is some truth to those jokes. All degrees are not created equal. It can be very difficult to find a job in certain fields of study. As I went over in a previous post, one of the reasons people default on their student loans is that they cannot find a job in their field and are unable to make enough money to meet the minimum payments on their loans.

    Now, I want to make two qualifications to the above. The degree you choose is not the be all end all. A strong work ethic and being a good steward of your work is a far greater determining factor in your career than what you majored in. If you work smart and work hard, you can excel. However, it can be a lot harder to get your foot in the door based on your degree. Maybe you’re very intelligent and a great worker, but it could be a bit of a struggle at first to find a place that will let you showcase that.

    The more important qualification, though, in determining what you’ll study is how you can use that degree for the Lord. Matthew 6:33 says “But seek first His kingdom and His righteousness, and all these things will be added to you.” As Christians, we are called to give every aspect of our life over to God – and that includes your occupation. A huge factor to consider is how you can use your degree, the education you’ve received, and the occupation you hope to have for God.

    It’s not that far-fetched of a concept. In our fellowship, I know some people who graduated with a degree in computer science, and have used their abilities to help run the fellowship’s web sites (and fight off hacks from the Russians every once in awhile). Is your degree something you can make use of for the Lord?

    3. Get Scholarships. As Many As You Can.

    Why pay to go to school when you can be paid to go to school? That is the essence of what scholarships do. Unlike grants, which are based on financial need, scholarships are generally based on merit. A scholarship is either awarded by the university you are attending, or by a private organization. You might think that you don’t qualify for any scholarships, but that is not true! There are thousands of scholarships out there.

    For example, here is one scholarship that Kent State University offers – the Trustee Scholarship. In order to obtain this scholarship, all you have to do is have a 3.25 GPA in high school and score a 21 on your ACT. For doing that, Kent State will give you $1,000 – $4,500 a year to attend their college. The only catch is, for this and for many other scholarships, is you need to have good grades. You probably didn’t want to hear another “do good in school” lecture, but you’re going to get one anyway. Working hard in high school to get good grades can have a far greater impact than what’s on your report card. It could translate into money for college, which is definitely worth putting in some extra work at school in my opinion.

    Imagine if the government or other organizations were giving out free money. All you had to do was fill out some forms, and you could possibly get this money. That’s what scholarships are! There’s no reason not to fill out as many applications as you can.

    For anyone considering Kent State, my alma mater here is their scholarship search tool. Check it out, it could save you a lot of money in the long term.

    4. Stick With Federal Loans

    You’ve picked a school, a major, and received some money in scholarships. But you still need to take out some student loans in order to pay your tuition. That’s fine – just play it smart with the loans you take.

    In an earlier post, we discussed the differences between federal and private loans. It was pretty obvious that federal loans were far superior to private loans. You will thank yourself later if you stick with federal loans and avoid private loans. Get subsidized loans first if you can, then unsubsidized. If you still need to take out more loans after exhausting all of your federal loans, maybe you’re paying too much for college. Seriously. If you are set on taking out private loans, shop around. Find a loan that has the lowest interest rate. Read the terms of the contract very carefully, and make sure there is nothing in there that could come back to haunt you.

    5. Take Only As Much Loans As You Will Need

    Did you know the amount of loan money you are offered is in no way specific to the amount you will actually need? Most likely, you will be offered much more in loans than you actually require for tuition and other education-related expenses. Only take out what you need. It can be tempting to take out more, or even all that you are offered. It can look like you are getting free money, but the reality is you will pay for that money and then some further down the line.

    Also, use your loan money for school only. There seems to be a nationwide epidemic of using loan money for non-school related purchases, as written about in this article from TIME . The author, Suzanna de Baca, puts it well “These students will be paying high interest rates for purchases they probably won’t even remember in five years.” Yeah, you could get a new computer with that loan money. But how will you feel in 5 years when that computer is now obsolete but you’re still paying back the loan you used to buy it?

    Hopefully these tips have been of some help, or got you thinking about loans in a way you hadn’t before. You have your whole college career in front of you. Enjoy it, but be responsible with your loans and your money. I have met countless graduates you have expressed to me everything they wish they could’ve done differently about their student loans when they were younger. You don’t have to be like that, though. You don’t have to graduate college burdened and stressed out by your debt. The ability is in your hands.

    What Happens If You Can’t Pay? Part 2

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    Last post, I got a little too caught up in the fun of student loans and realized 900 words in that I hadn’t even gotten to the intended topic of the post yet. So I am going to hop right in here and start discussing what happens when you default on your student loan payments.

    When you default on your loans, a lot of things happen. A lot of bad things. First off, the whole balance of the loan plus interest becomes due immediately. Whereas before, only the minimum payment was due each month, now you owe the whole amount right now! And if you can’t make those monthly payments, there’s no way you can pay off the whole thing. This process is called acceleration. The lender might also turn over your loan to a collection agency, who will attempt to wring the money out of you.

    And there are a lot of ways for them to wring the money out of you! The federal government can have your employer garnish your wages. This means that money will be automatically deducted from your paycheck and sent to the government in order to pay back the defaulted loans. The government can garnish up to 15% of your after-tax wages, and they can do this without a court order. Lenders of private loans can have your wages garnished too, but they will need a court order.

    Also, the government can withhold your federal and state tax refund. Instead of getting a nice tax refund, the IRS will hold your refund and instead have it apply to your defaulted student loan debt. The official term for this is a tax offset.

    If you had difficulty with student loan payments before, imagine how much more difficult things will be when your wages are being garnished and your tax refund is taken from you.

    Going into default on your student loans will also wreak havoc on your credit score. A credit score is a “statistically derived numeric expression of a person’s creditworthiness that is used by lenders to assess the likelihood that a person will repay his or her debts (Investopedia).” Your failure to repay your loans will be reported to credit bureaus, who will significantly lower your credit score. A bad credit score will make companies averse to lending to you, since are now seen as having a risk of not paying back your loans.

    A bad credit score can make it difficult or impossible to get a home mortgage, a car loan, or any other type of loan, including a credit card. If you can get one of these, it will most likely have high rates and other unfavorable terms designed to protect the lender in case you default again. A bad credit score can affect you in ways other than your ability to take out loans. Landlords can deny your rental application because of poor credit. Utility companies could choose not to work with you, or make you pay a large deposit up front. Insurance companies will also do a credit check before issuing you a policy, meaning you may have to pay higher rates for car insurance, renter’s insurance, or homeowner’s insurance. These problems associated with a bad credit rating won’t go away once you get back on track with your student loans. Credit ratings take a long time to recover, and it will take years of financially sound living to return your score to a good rating.

    This all seems pretty bad, right? Defaulting on your student loans can affect you in ways you wouldn’t even imagine. Who would think that you could be denied rental of an apartment because you failed to pay back your student loans? But that’s the way things operate in our world, and we need to be aware of the far-reaching consequences of defaulting on student loans.

    And it doesn’t end here. When you default on your student loans, you can also be charged several other fees; late fees, collection fees, or even attorney fees and legal fees if the lender takes you to court (which they can and may very well do!).

    If the financial obligations of paying student loans is overwhelming, they can be discharged in bankruptcy. However, I would not recommend this step. Getting your loans discharged through bankruptcy is extremely difficult, and there are many other consequences associated with declaring bankruptcy.

    So, putting it all together we see that defaulting on your student loans will have a drastic effect on your life. If you were having financial trouble with your life before, going into default will end up making things even worse! The balance of your loan will increase with all the added fees, and the whole amount will be due immediately. Your credit score will tank, and you’ll have to deal with all the problems associated with that. Factor in the all the stress related, and we can see that it is a messy situation indeed. This is why it’s so important to think about your loans and take them seriously. No one wants to end up in this situation, yet many people do. As I said in the last post, you don’t want to be that 1 in 10 who will default on their loans.

    The best method of avoiding default on your loans is to be smart about them. Don’t take a single cent more than you need. Plan out your payments, even when you are still in college. This will give you a better idea of the cost of your loans, and you can determine how much you could reasonably pay back.

    On the other hand, if you are having difficulty paying your student loans, or have already defaulted, there is hope! The worst thing you can do is get discouraged and give up. In a later post, I will be covering what you can do if you are faced with such a situation.

    I know I’ve thrown a lot of information at you in these posts, but I believe that in order to be effective with our loans we need to understand them outside and in. I think we’ve reached that point; now it’s time to get into the good stuff. The next few posts will cover some best practices for student loans. I intend to cover all walks of life, from high schoolers just looking at college and loans, to people who have graduated and are paying off their student loans right now. Student loans can really mess up your life, but they don’t have to. It’s all up to you.

    What Happens When You Can’t Pay? Part 1

    Yesterday, the Department of Education released some good news about student loans. In this press release, the Department announced that the default rate for student loan payments dropped over the past year. Why is this good news? Well, the default rate is the percentage of borrowers who are unable to repay, or default on, their student loans.

    To calculate this default rate, the Department of Education looks at all borrowers who started repaying their loans three years ago. The number of those borrowers who were unable to repay their loans at some time throughout those three years represents the default rate. The fancy name for this rate is the “Three Year Federal Student Loan Cohort Default Rate.”

    The default rate just released by the government is 11.8%, which means that of the 5.1 million student loan borrowers who began repaying their loans sometime between October 1, 2011, and September 30, 2012, 11.8%, or 611,000 people defaulted on their loans before September 30, 2014. This is a drop from last year’s default rate, which was 13.7%. In fact, the default rate has been trending down recently, as the rate the year before that was 14.7%.

    While this is good news, it still shows that there is a significant problem with student loans. The default rate shows us that over 1 in 10 people will default on their loans within three years of starting repayment. Take a look around your class the next time you are in one – 1 out of every 10 of those people will be unable to pay back their student loans at some point. And maybe, one of those people will be you! Hopefully not, and hopefully these blog posts will help you to avoid that.

    In this post, I want to go in depth on what happens when you, like 1 out of 10 people, default on your student loans. There are many severe consequences to this that people don’t realize. But before doing this, I think we need to do a quick clarification on a couple things.

    First, what exactly does it mean to default on a student loan? The technical definition is “the failure to make payments on your student loan as scheduled according to the promissory note (contract) you signed when you took out the loan.” For most federal loans, the loan will be considered in default if you go 270 days without making a payment. For private loans, when the loan is in default is determined by the contract.

    Second, what causes people to default on their loans? There are a lot of decisions people make that unwittingly set them up for default years down the line. I want to take a look at some of these different scenarios, because some of them might happen or might have already happened to you!

    1) The Over-Borrower. Someone who takes out way too many loans. They take out more loans than they actually need for tuition, and spend the rest on other expenses. Could also be someone who goes to an expensive university. They graduate with a heap of debt, and quickly realize that they aren’t able to meet the minimum payments on their loans.

    2) The Too-Much for Too-Little. This is a person who took out student loans to get a degree that isn’t really feasible for a career. In essence, they paid too much and received too little. We can all make jokes about art majors working at Starbucks, but it is a real and unfortunate phenomenon. Some people take out loans for a degree that will not earn them enough money to pay back those loans! Or worse, some people can’t even find jobs for their degree. This specific situation is covered more in the next point.

    3) The Under-Employed. We know our economy has unemployment problems. Something that isn’t talked about as much is under-employment. Under-Employment is when an individual has to take a job in a field that they are overqualified for because there are no available jobs within their field of study. These jobs almost always pay less, and the low pay can cause some people to default on their student loans.

    4) The Career-Changer. This person quickly finds out the career field they majored in is not the one for them. Whether the stress level is too high, or they just don’t like it, they leave that field and try to find a job elsewhere. The only problem with this is that it is hard to find a job with an applicable degree. Many people in this situation end up in jobs with lower pay, and are thus unable to make the required payments on their loans.

    These situations are all traps to avoid, because falling into them gives you a higher chance of defaulting on your student loans. When choosing what school you’ll attend, what degree you’ll earn, and how many loans you’ll take out, you need to really calculate whether you will be able to pay back those loans or not – you don’t want to be a part of that 11.8%.

    Whew, that was a lot of stuff already! And I haven’t even gotten into the topic I actually wanted to cover; what happens when you default on your loans. However, I want to keep things at a manageable level, so instead of overwhelming you with more information, I am going to end this post here. The next post will cover the consequences of defaulting on your student loan payments. Sorry if I misled anyone, and be sure to check out the next post, as it contains some seriously frightening information you won’t want to miss.

    The Different Types of Student Loans

    If you’ve been reading through these blogs, I’m sure that by now you are sick and tired of hearing about student loans. If that’s what you are thinking, then too bad, because I’m going to be writing about student loans again. In this post, I’m going to be taking a look at the different types of student loans available.

    The first distinction among loans that we will look at is federal loans and private loans.

    Federal loans are loans that are offered and funded by the federal government. Private loans are any loans through an institution that is not the federal government. This could be a bank, a credit union, or some other sort of non-federal agency.

    Let’s do a quick comparison of federal and private loans. Federal loans have a fixed interest rate that is set by Congress. The interest rate for a private loan is set by the lender. The interest rates for a private loan can be variable, meaning the interest rate could rise. While you are still in school, you do not have to pay interest on your federal student loans. Federal loans also offer several different repayment plans, have no prepayment penalty, and can qualify for a forgiveness program if you work in public service. This is guaranteed for federal loans. For private loans, it depends on the contract drawn up by the lender, and many times these advantages are not included in private loans.

    Private loans also tend to be more expensive than federal loans. The interest rate for a federal direct subsidized loan is 4.29%. If you are looking at taking out a private loan, make sure it has an interest rate lower than the federal standard. However, keep in mind that the interest rate on private loans can change. When offered a private loan, check the contract to see if the interest rate is variable or fixed. Some companies will offer you a lower starting interest rate to lure you in, then raise the interest rate in subsequent rules. As a rule of thumb, it is best to avoid private loans, and if you must take out loans, take out federal loans.

    Let’s focus more on federal loans and the different types of federal student loans a person can take.

    The first type is a direct subsidized loan. A direct subsidized loan has a fixed interest rate of 4.29%. The interest that accrues while you are in college (enrolled at least half-time) is paid by the federal government. However, once the grace period is over, you will have to pay the interest yourself. Another way to think of it is that when you begin repayment of the loan, the amount of your loan to pay back will still be the principal. In order to qualify for a direct subsidized loan, you have to demonstrate financial need. A disadvantage to this type of loan is that there is a small fee (around 1%) charged for taking out the loan.

    The second type is a direct unsubsidized loan. Everything here is the same as above except for two things. First, the government does not pay interest that accrues while the student is enrolled at college. However, that does not mean you have to pay the interest while you are in college. You can choose to hold off paying the interest penalty-free until the grace period for the loan is up. If you choose to do so, then the amount of the loan at the end of the grace period will be the principal plus any accumulated interest. Secondly, financial need does not need to be demonstrated in order to qualify a direct subsidized loan, anyone can receive one.

    The next type of federal loan is a Perkins loan. A Perkins Loan is similar to a direct subsidized loan, in that the interest is paid for you while you are in school. However, the interest rate for a Perkins loan is higher, currently fixed at 5%. On the other hand, there is no fee charged when you take out the loan. In order to qualify for a Perkins Loan, a student will have to demonstrate significant financial need, greater than what is needed for a direct subsidized loan. A final difference is that the lender for the Perkins Loan is your school, whereas for other types of federal student the lender is the federal government’s Department of Education.

    The last type of federal loan is a direct PLUS loan. This type of loan would not be taken out by a student, but by their parents. It is intended for parents who are paying for a dependent child’s education. direct PLUS loans have a higher interest rate, fixed at 6.84%, and a high loan fee, 4.272%. A direct PLUS loan is like an unsubsidized loan in that interest is not covered by the government while the student is in school.

    This has been a lot of information, but from this I think we can draw a couple helpful points.

    First, avoid private loans and stick with federal loans (unless you find an amazing deal even after reading through the fine print).

    Second, subsidized loans are much better than unsubsidized loans. For subsidized loans, the government will pay your interest payments for you while you are in college. For unsubsidized loans, while you can defer payment of interest while in college, you will have to pay that money eventually.

    One of the reasons many people fall into serious financial trouble with their student loans is that they don’t understand the provisions of the different loans they take. Many people find themselves in unfavorable contracts with private lenders, or took out unsubsidized federal loans not realizing that interest would still accrue while they are in school. Hopefully this post will help you to be smarter about what loans you take.

    But what about the people who are struggling to repay their loans? What happens when the burden of loan payments is too much and you can’t feasibly meet your minimum payments anymore? The consequences of failing to meet your loan payments will be covered in my next post.