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You could dig a hole in the sand, stick your head in it and hope that your student loans kind of work themselves out, but as much as we wish it would, that’s not going to make them go away. As the cost of higher education keeps increasing, staying on top of student loans, from calculating how much you need to repayment planning, is necessary for financial survival. Understanding these facts will keep you in the know about the big picture of student loan debt in our country and how it applies to you.
According to the Brookings Institution blog, the percentage of households with student debt jumped from 9 to 19 percent. In 2013, student loan balances reached $1.2 trillion. To put these numbers in perspective, let’s look at it this way: Americans owe more in higher education student loans than they owe in credit card debt and more than they owe in automobile loans. The only debt with a higher national balance is mortgages.
The average amount of debt for a spring 2014 graduate with student loans was $33,000, according to the Wall Street Journal and data analyst Mark Kantrowitz. This amount is almost double what students owed 20 years ago, with inflation adjustment.
Using the interest rate of a Federal Stafford Loan (4.66%), the 2012 average student loan debt, and an estimated payment of $300/month, I used this student loan calculator from BankRate to estimate how long it would take to repay the average student debt. If you start paying off a $29,400 student loan at age 23 with the above qualifiers, you will be 33 or 34 (10 years + 4 months) by the time you have paid it off. You will also have paid $7,627.40 worth of interest on the loan.
In 2012, the mean amount of student debt for graduate students (combining their undergraduate and graduate school debt) was $57,600, according to Jason Delisle’s Graduate Student Debt Review. However, 1 in 4 students owed $99,614 or more, and 1 in 10 owed $153,000 or more. These numbers are a pretty big jump from their 2004 and 2008 equivalents, when the means were $40,209 and $43,966, respectively.
Thankfully, this fact no longer applies to borrowers of federal loans. However, if you have taken out private student loans from a bank or other borrower, your family could be responsible for paying back your student loans if you pass away.
If you are considering taking out a private student loan and a member of your family is planning on cosigning the debt for you, a short term life insurance policy would protect your family from this tragic possibility. If you had a cheap life insurance policy during the repayment period of your loans, with a small death benefit that covered the co-signed debt, this would greatly reduce the risk of leaving your parents with your debt.
If you are thinking about filing for bankruptcy to seek student loan forgiveness, this is probably not the best option. Unless you can prove that repaying your student loans would cause you "undue hardship," you cannot dispel them through bankruptcy. If you really feel as though your current situation does not allow you to repay your student loans, you should instead consider deferment or forbearance.
According to Wisebread’s article on paying back student loans faster, deferment works by allowing you to stop paying the principal on student loans when you are out of work or meet criteria about economic hardship. While this is going to make your repayment time longer, it could give you some time to figure out your finances. However, if your loans are unsubsidized, interest will still build up during your deferment period.
Forbearance is used when you need a break from making payments for a few months. With private or federal loans, forbearance lets you reduce or stop making payments for a set amount of time, but interest continues to build on the loan while payments are halted.
Before you take action on one of the options above, you should know that there are other ways to repay your student debt on a budget. One option is to check if you qualify for income-based repayment. IBR lets you pay back your federal loans based on what you earn, not on what your monthly payments would otherwise be. Wisebread’s article states that under IBR, your monthly payments would be 15% of your discretionary income. If you make payments under IBR for 25 years and meet some other requirements, the article also states that your remaining balance could be canceled.
Enrolling in auto debit could also get you a discount on loan repayment. Wisebread recommends having your monthly loan payment automatically deducted from your account, as you could receive a .25% interest rate reduction for paying this way each month.
And yes, loan forgiveness is not a mythical unicorn. It does exist. Certain nonprofit organizations and volunteer programs like Americorps will help repay loans in exchange for agreeing to work or volunteer in rural or underserved areas, according to Kelsey Sheehy of U.S. News.
If you’re starting to freak out a little, fear not! There are many passionate movers and shakers out there working very hard to try and fix the American student debt crisis. According to Higher Ed Not Debt, Public Policy Polling found that, during the 2014 midterm elections, 73% of voters supported allowing students to refinance student loans the same way other debts can be refinanced. The Student Debt Crisis also reports that because the Higher Education Act must be reauthorized, positive change could be on the horizon for students. Both organizations have online petitions you can sign and educational materials about legislation.
Photo: John Parady
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