The Consumer Finance Protection Bureau refocused national attention back on student loan debt last week, proposing tighter control of nonbank loan companies they say have treated borrowers poorly, according to the Associated Press.
But while regulation may make paying off student loans easier for graduates who have experienced lackluster customer service, lost paperwork and transactions that have not gone through, student debt is still hard to pay off and the cost of attendance continues to rise.
The average student from the class of 2011, the most recent data available, graduated with $26,600 in debt, according to a report from the Project on Student Debt.
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And with default rates at a record-high, planning is more important than ever.
If you’re about to graduate and you’ve been putting off determining a loan payment plan, take the time now to learn your options, and use these tips to do it at the right pace for you.
1. Start planning. Now. The sooner you start, the sooner the debt will be repaid. The monthly payments will become rhythmic. Don’t be afraid or overwhelmed. Research all the options available. If you’re feeling overzealous, begin during your last year of college.
2. Pick the right plan for you. There are four main payment plans offered for federal loans. Three are for graduates relatively secure in their finances:
- Looking to get out of debt as quick as possible? The standard plan is the quickest repayment method and mandates a minimum of $50 a month for as much as 10 years.
- Have a larger than average debt or want some extra time? The extended payment plan is similar to the standard plan and has minimum monthly charges of $50, but it gives graduates the chance to take 12 to 30 years to pay back the loans. Where the standard plan may require more than the minimum for higher debts, the extended plan allows more room for paying the minimum.
- Want low payments at first? The graduated plan has a timeframe of about 12 to 30 years and offers minimum monthly payments of as low as $25. Payment minimums will increase over time but the plan lets graduates spend on other costs when first starting out.
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But if you’re looking for something more tailored to your financial needs or you’re worried about defaulting, look into the income-based plan. It adjusts your annual amount due to 15 percent of your projected income for the year. It takes 25 years and is best for graduates who do not have a stead flow of income or expect their salary to rise in the future. After the 25th year, the rest of the debt is exonerated.
3. Don’t overestimate your finances. An average of 13.4 percent of students defaulted on their student loans just three years after starting to pay them off, according to the most recent Department of Education statistics available. That number jumped to almost 23 percent for students who attended private institutions. Keep this in mind. Take your finances seriously and don’t commit to a payment plan that won’t work for you.
4. Scrounge to come up with more than the monthly minimum. Transaction charges will add up. Interest on your loans will increase over time. Especially if you cannot afford the standard payment plan, paying the bare minimum each month for an upwards of 30 years will tack on thousands to your overall bill. During months you can squeeze an extra $25 or more out, put it towards your student loan debt.
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5. Consider Consolidation. You can merge all of your loans, be them from the federal government or a lender, under the Federal Direct Loan Program. This means that if you have multiple loans from different places, you can save yourself from managing each separately and pay off the total every month. There will be less paperwork and it will cut down on confusion. Your payments will also be less, but keep in mind that more debt will take longer to pay off, which will increase overall interest paid.
6. Can’t pay? Know your (limited) options. It is very unlikely that your debt will be forgiven, unless you can prove that extreme circumstances like severe disability are hindering your ability to pay. Graduates can postpone payments, though, if they qualify for deferment or forbearance. Deferments are given, for example, if a borrower goes back to school, is unemployed or begins military service. It is up to the lender to decide if a financial hardship not covered by deferment is an acceptable forbearance.
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