Graduating from college can be one of the best feelings you will ever have! The satisfaction of having completed the years-long task of preparing for your chosen career field, not having to worry about tests or homework, and not having to be a poor college student any longer likely sounds enticing. However, a dark cloud may be hovering over your head that may put a damper on your celebrations: student loans.
Student loans can be the largest loans you take out in your life besides a home, and paying them off can be difficult. Unlike a lot of debt you may have in your lifetime, student loans are with you for life. Even if you declare bankruptcy, they will still follow you and require payment. If you are staring down large loan amounts, there are some key steps you can take to pay off student loans successfully.
- Negotiate Favorable Repayment Terms
- Consolidate Your Loans
- Participate in Loan Forgiveness Programs
- Pay off your smaller loans first, and roll those payments towards the next largest, and so on.
- Try freelancing professional services
If you have direct loans, or loans directly with the federal government, there is some leeway that is offered to allow making repayment easier. You will not have to worry about making a payment for at least six months after graduation, you can use income-based repayment (which lowers your payment amount to fit your budget), and even temporarily stop payment (called forbearance) if you need some breathing room. All of these options are better than defaulting on the loans or having late payments.
If you have a lot of different student loans, considering consolidating them into one single loan. The biggest advantage of this is that your monthly payment will go way down. If you have 10 loans, you have 10 monthly payments. If you consolidate, now you only have one payment. Even if that payment is an average of the original 10, you are still paying less per month than you otherwise would.
Depending on what career you have chosen, the government offers options for your loans to be forgiven in full. As you can imagine, certain restrictions come along with this program, but if you qualify, the benefits are amazing. To qualify, you need to have the following:
Direct Federal Loans: Your loans must be directly from the federal government to qualify for this program. If you have loans with private institutions, like a bank, they do not qualify for this program.
Have 10 years of payment history: Just because you may qualify for the program does not mean you are not required to make payments. You need to make on-time payments for 10 years. After the 10 years, the loans will be discharged (given that you have followed all the steps)
Be in the right career: You can't just be in any job you want. The purpose of this program is to entice new graduates to work in low-income jobs that they might otherwise overlook. The following are qualifying job types to be able to participate in this program, and you must be working full-time
Any level of government: Local, state, or federal positions apply!
501(c)(3) nonprofits: Examples of these kinds of institutions could potentially be private schools, certain religious organizations, and more.
Be a part of AmeriCorps or the PeaceCorps: Americorps allow you to help in underprivileged areas where you are paid a stipend. This takes place in the USA. The PeaceCorps are similar, but they take place abroad.
Other Non-Profits: Just because a non-profit is not a 501(c)(3) does not mean it will not be eligible for this program. All they need to do is have a primary function of offering a qualifying public service, and you may still be eligible for the loan forgiveness program.
Make sure that you are on income-based repayment: You may already be on income-based repayment, but it is a requirement to be eligible for the loan forgiveness program.
Depending on your skillset, you may be able to freelance your services for extra side cash. If you already have a full-time job with benefits, this is especially useful as you do not have to worry about finding health insurance. The freelance market can accommodate all kinds of different skills, and gigs exist in both full and part-time capacities. Here are a few examples of areas of freelance work:
- Writing
- Customer Service
- Software Engineering
- Coding
- Tutoring
This is by no means a comprehensive list. Sites like Fiverr and Upwork have all kinds of jobs imaginable. Even if you do not think you have a marketable skill, you may be surprised how many gigs match your skillset.
This is often called the "debt snowball," as your payments snowball to become larger and larger as your smaller loans are paid off. This may seem like a slow process, but if you force yourself to stick to it, it becomes very effective. Here is an example of how it works:
Let's say you have three loans. One loan for $1000, another for $500, and another for $100. They all have their separate payments. The payment on all loans is 10% of the base (so $100, $50, and $10, respectively). Work hard to make extra payments on the smallest loan. When it is paid off, you have an extra $10 in your budget. Use that $10 for the next loan. Instead of a standard payment of $50, you are now able to pay $60. When that loan is paid off, roll it into the $1000. Now, instead of paying $100, you can pay $160. You will end up paying off the largest loan nearly twice as fast as you otherwise would.
Paying off your student loans can be a daunting task, especially if you are just starting your new career. However, you do not need to let your student debt overwhelm you. Instead, follow the aforementioned steps, and you will start paying down those loans in no time!
Should I Consolidate My Student Loans?
You've graduated from college and you're entering the work force. You proudly hang that academic degree on the wall of your office or workstation and you sit back, put your feet up, and smile. You did it. You made it. This is a dream come true. You can take on anything or do anything.
Wait, really? Now that you've graduated your mailbox is starting to fill up with bills from lending institutions, telling you it is time to start making your monthly payments. And you're not alone. This article from early 2019 indicates that Americans are more burdened by student debt than ever in the past. As a whole, Americans owe upwards of $1.56 trillion in student loan debt, spread out over 45 million borrowers. That's $133,333 per borrower! Yikes, and you're one of them! And your typical monthly payment is almost $400, which eats away at quite a bit of the starting take-home pay in your first real job. You are realizing that you might be in over your head, and there has to be an easier way. You are considering loan consolidation.
Generally, when people talk about student loan consolidation, they are referring to a loan option that allows them to transfer balances from multiple loans into one new loan. This is a low-interest loan that is used to pay off all of your high-interest loans, allowing you to make one payment per month, usually for a reduced payment each month. Because your payment is lower and you are still responsible for all of your debt, it is likely that your loan repayment period will be longer. But the benefit is that your monthly financial situation is now easier to bear.
However, if you pursue a student loan consolidation option that offers some sort of debt relief (also called debt forgiveness or debt settlement), or reduced payback amount, this means that someone somewhere is going to take a penalty of some kind. Usually, this means that the creditor is not going to get the full amount of interest that they had billed you, as the account has been settled. And when this happens, you will face a penalty as well, generally in the way of a derogatory hit to your credit rating.
For purposes of this topic and to prevent confusion, we will focus on student loan consolidation exclusive of loan forgiveness or relief programs. Loan management is all about responsibility, education, and making good choices. By having a keen eye on your monthly budget, you will better position yourself to make smart decisions on your monthly spending habits.
But that doesn't mean that you should not consider consolidating or refinancing your student loans.
Student loan debt consolidation
Specifically speaking, student loan debt consolidation is exactly that; a consolidation of all of your student loans into one. Is it not atypical for students to take out multiple loans throughout their college education, and managing the various payments and interest rates for each can be confusing and intimidating. Plus, the risk of missing a payment or paying a loan late increases with the number of loan payments that you need to manage in any given month.
Another option is to consider refinancing your loan. This article from LendingTree walks you through the differences between loan consolidation and refinancing. As the article will tell you, both consolidation and refinancing combine your multiple loans into one, allowing you with an easier repayment. But generally, direct loan consolidation only allows you to roll over your eligible federal loans, and doesn't lower your interest rate. Refinancing on the other hand will allow you to roll over your federal and private loans. While not guaranteed, refinancing can offer you a lower payment and lower interest rate.
Student loan consolidation calculator
A great place to start when considering your student loan consolidation options is a loan calculator. Here is a list of just a handful of calculators that can be accessed online: Student Loan Calculator
These calculators allow you to enter key information including your loan balance, interest rate, payoff date, etc., to determine what a new loan would look like.
Student loan consolidation rates
Interest rates for student loan consolidation loans will vary, sometimes widely. It is dependent on your credit history, the amount of debt you need to roll over, etc. This article from StudentLoanConsolidator.com states that the interest rates for a direct consolidation loan are based on the weighted average of the interest rates of the federal student loans that are being included in the consolidation, rounded up to the nearest 1/8th of one percent.
If that sounds complicated, it really isn't, but take a look at the above-referenced article for an example of how the interest rate is determined. If you don't want to try the calculator now, just know that currently, interest rates on average hover between a 2.48% APR (variable) to more than 8.80% APR (fixed).
Student loan consolidation companies
This article from US World & News Report provides insights into their recommended student loan consolidation companies for 2019. As the article states, not every refinancer is perfect for every customer. As with any financial decision, it is important to do your homework.
Here is a quick summary of the best loan consolidation companies as outlined in the afore-mentioned article.
- Discover: Best Lender with No Loan Fees
- Earnest: Best Lender for Fair Credit
- Laurel Road: Best Lender with a Co-Signer Option
- SoFi: Best Lender with an Instant Decision Available
- Education Finance: Best Lender with Up to a 20-Year Loan Term
- Splash Financial: Best lender for loans of up to $300,000
Low interest consolidation loans
A U.S. News survey indicated that while most graduates don't regret taking out a student loan or loans, the resulting debt has a significant impact on their life goals, often slowing down their ability to own a home, take a bucket list vacation, etc.
Student Loan Hero, a division of Lending Tree, provides recommendations in this article for a variety of low interest student loan consolidation options. Of the six loan companies listed in the article, all claim to offer consolidation options between 2.49% on the low side to 9.06% on the high-end.
With whatever consolidation loan option you choose, you will likely benefit from:
- Eased ability to pay your bills – more money left over each month for other expenses
- Increased mobility for job opportunities
- A decrease in likelihood to default on other credit or loan accounts
So, as with any big financial decision, do your homework or take advisement from a financial professional or a representative from your bank. There are professionals available to you that have worked with countless other graduates in similar situation to yourself, that can offer guidance and walk you through the student loan consolidation process. You don't have to do this on your own; help is available.
