Mid-terms, exams, and the all-nighters that come with college life are over, but the real challenge begins with repaying the student loans. Initially, the monthly bill can be higher than a car payment, and as a newly graduated professional, you’re likely not making your ideal income yet. A glimmer of hope engulfs you because of the dozens of emails about “student loan forgiveness” in your inbox. Then that critical thinking voice you used throughout your student life kicks in and asks, “Is student loan forgiveness too good to be true?”
While many organizations prey on desperate borrowers, and you should be aware of what to look for, some options can make repayment much more manageable. Study your options before you jump into a repayment plan or double click on that spam-looking email. You’ll save time, money, and a massive headache.
Identify the Fiction
The fantastic offers from lending organizations can be extremely inviting, especially if your credit score has room for improvement. These lenders often offer promises they can’t keep and won’t hesitate to exploit your lack of knowledge.
Scams like this are usually trying to get your personal information like your bank account, social security number, and any other details to get money out of you. One of the key indicators is the sense of urgency to “act now.” They’ll lead you to believe the forgiveness program could be discontinued at any time, and calling them is the only way to get the deal. This sentiment is often expressed by saying, “Enrollments are on a first-come, first-served basis” or “Your student loan is flagged for forgiveness pending verification. Call now!” Nearly all of these lenders will ask for an up-front fee. If they do, it’s a pretty safe bet they don’t have your best interests in mind.
Federal vs. Private
Viable repayment options depend on whether you have federally-sponsored student loans or private loans. Each one comes with a different set of options, but private lenders generally have fewer options.
Federal student loans typically offer low-interest rates for the life of the loan. The most common types of federal student loans are direct subsidized and direct unsubsidized loans. No credit history is required to qualify for either option, but one key difference is interest. A direct subsidized loan doesn’t need you to pay interest until graduation. While an unsubsidized loan, otherwise known as a Stafford loan, begins accruing interest at the time of disbursement.
A private loan was likely attained if you didn’t qualify for a federally-sponsored loan. The interest rates can vary greatly, and repayment options are the same. Although some lenders offer some deferment or forbearance, be sure to do the math on the interest you’ll pay over the life of the loan. Catching a break on payments today can bite you with high-interest rates tomorrow.
Federal Repayment Options
The US Department of Education has designed repayment plans that can give more time to repay or base the repayment on your income level. Here are some of your options:
Public Service Loan Forgiveness refers to a portion of the student loan, or the entire loan, being canceled from your obligation to repay the balance. This option has many requirements, one of them including a 10-year work history at a non-profit or government agency. On the surface, this option is quite appealing, but good luck meeting all the requirements.
Student Loan Forbearance is a short-term halt on your monthly payments. Keep in mind that this option means the loan still needs to be paid back. Payments are stopped to allow you to get to a financially secure enough space to resume payments at an agreed-upon date. Before locking into forbearance, check to see if the interest stops accruing. If not, be sure to factor that in to calculate the overall costs.
Income-Driven Repayment Plans consist of four different plans centered on your income level. Essentially, a payment plan is created based on a percentage of your discretionary income. The extra money you make above the minimum needed to support yourself is considered discretionary income.
Private Repayment Options
Student loans from private lenders look similar to traditional bank loans, with several exceptions. Generally, there are four types of plans, and every private lender does not offer all or any of these options:
Immediate Repayment is precisely how it sounds. The minute the loan is dispersed, payments on the principal with interest begin.
Interest-only Payments work similarly to a federal student loan in that while still in school; you only pay interest on the loan. After graduation or if you drop below half-time enrollment, the payments on the principal and interest begin.
Fixed Payments have a fixed amount while attending school; however, larger payments begin after graduation or below half-time enrollment.
Forbearance is when you pay zero dollars while in school and begin making regular payments on interest and principal after you graduate. This option usually requires a significant financial hardship and is not offered by every lender.
Getting hit with hefty student loan payments is enough to jar anyone out of their comfort zone. Before starting a student loan repayment plan to relieve the pressure, explore all the options. Take caution in what you share with companies that make promises that fall outside of established routes. A little homework can go a long way to make your payments more affordable and keep your finances in good standing.