Student loan debt has reached epic proportions and is on the rise. So-called “super-borrowers” are racking up student loan debt to the tune of $100,000 or more for the sake of an education. While many of them are taking on six-figures in loans to earn an MBA or get through law school, others are using the money to fund their undergrad experience at pricey private universities.
When you consider that 20-somethings face one of the toughest job markets in history, it’s a big gamble to make.
Figuring out how to organize and pay student loans when the amount you owe is the equivalent of a mortgage can be overwhelming, especially if you’re struggling to get by on an entry-level salary.
Learn what you can do to ease the financial burden and boost your motivation to keep chipping away at the debt.
Consider Income-Based Repayment Options
If you owe federal student loans, you may be able to get some temporary relief in the form of an income-driven repayment plan. Unlike the standard plan, which caps the repayment period at 10 years, these plans allow you up to 25 years to pay back what you owe. If you haven’t paid off the balance by then, you may be able to have the rest of the debt forgiven.
How payments are calculated
Income-based repayment limits your monthly payment to 15 percent of your discretionary pay and your payments can go up or down as your income changes. This option is available for students who owe Direct, Stafford, PLUS or consolidation loans. The Pay As You Earn Program calculates your payments as 10 percent of your income and payments are stretched out over 20 years. There are also Income Contingent and Income Sensitive plans that have similar terms.
If you’re just starting out in your job and not making the big bucks yet, choosing an income-driven option can make your payments more manageable until you start earning more. The longer you stay on the plan, the more you’ll pay in interest for the loans but it’s a better alternative than default.
Note: Keep in mind that if you end up getting some of your loans forgiven once the repayment period ends, you may have to shell out income tax on the difference.
Streamline Private Student Loan Payments
Students often look to private lenders to cover the gap when they’ve exhausted their federal loan borrowing limits. While doing so can give you the money you need to finish up your degree, it usually comes at a premium since the interest rates tend to be much higher. Private lenders don’t offer income-driven repayment plans so if you’re struggling to keep up with the payments each month, your balance could quickly balloon even higher.
If you took out multiple private student loans, consolidating them and refinancing to a lower interest rate can create some breathing room in your budget. You make a single payment each month and you can reset the loan term so the amount fits with what you can afford to pay. The amount you can consolidate usually varies by lender, but some offer limits as high as $250,000.
Consolidate debt to pay less interest
When you’re shopping around for a private student loan refinance deal, you want to pay close attention to the terms of the loan. You’ll have to decide whether you want a fixed or variable rate for the loan and the one you choose determines how much consolidating or refinancing really costs you in the long run.
Fixed rates tend to be higher but your payments stay the same over the life of the loan. Variable rates are usually lower but the amount you pay each month or the number of payments you’re required to make may fluctuate.
You can use a variety of refinancing methods, including personal loans, credit cards, student loan refinancing options, and more.