Not everyone at university is fortunate enough to have their parents pay for their tuition. For those who don’t have this privilege, there is the option of a student loan. However, student debt incurred by a loan is becoming a serious problem in United States and in other countries. Like millions of American homeowners who found themselves trapped in houses they couldn’t afford, college graduates got entangled into a bubble of their own.
Many who took this gamble find themselves burdened with large student loans while the job market continues to struggle. As a result, student loan defaults are at their highest rate in over ten years, according to USA Today. And debt is wearing students down. Nearly 54% Millennial said debt was their biggest concern in a recent Wells Fargo Retirement Survey and moreover it can’t be discharged in bankruptcy, and if the state and lawmakers can’t cut a deal, the interest rate on Federal Subsidized student loans will double.
Ill- Affected Economy
In a speech in May, Richard Cordray, director of the Consumer Financial Protection Bureau said, “A college degree has the potential to become more of a burden than a blessing for those saddled with unmanageable debt in a tough employment market”. The effects of student loan debt will spill in every part of economy and is not only constraining young adults, but also, at least in the near term, holding back the recovery itself, some economists say. The shadows might remain even as the economy picks up, by making young workers more cautious when it comes to decisions about their careers and their finances. Millennial might end up buying less expensive homes or more often choosing to rent than previous generations.
Reduction in burden of student loan debt is only possible once you pick the right repayment plan and that too depends upon the type of loan you have. If your income is low or unstable or you have very high student debt compared to your income, you might be eligible for one of the repayment plans below:
- Income Contingent Repayment Plan (ICRP) – If you have a federal Direct Loan (other than a PLUS loan), you can opt for this plan which calculates your payment amount based on your income. No matter what your payments are, if you haven’t paid off your loan after 25 years, the government will cancel the balance.
- Income Based Repayment Plan (IBRP) – This repayment plan can be obtained for both Direct loans and FFELs, but you cannot be in default to qualify. Income based repayment plan offers more flexible options than under ICRPs or ISRPs. Your debt can be eliminated in after 25 years of payments; payments can be less than accruing interest.
- Income Sensitive Repayment Plan (ISRP) – In this plan, which is only available for a certain type of loan (called a FFEL), your payments are based on your annual income, family size, and total loan amount. Your payments must at least cover accruing interest and you must pay the loan off in ten years. But make sure you don’t have any other debt such as an overwhelming credit card debt and if so get your cards processed to the earliest.
- Hardship Repayment Plans for Perkins Loans – If you have a Perkins loan, you must pay at least $40 per month, but the school can extend repayment for another ten years or allow additional extensions for prolonged illness or unemployment.
Payment Plans without Financial Hardship
There are still other options available for restructuring your payment plans for federal loans, if you don’t qualify for a payment plan based on financial hardship. One can opt for a graduated payment plan where your payment starts low and slowly increases as time passes. A loan over a certain amount could be stretched for over 25 years of payments.
A consolidation allows you to combine one or more of your student loan into a single loan with one monthly payment. A consolidation loan can be helpful if you want to reduce your interest rate, you don’t qualify for another payment plan program, or you want to get out of default.
A deferment excuses you from making student loan payments for a set period of time because of some uncontrollable conditions in your life- such as returning school, economic hardship, or unemployment. The most important factor in deferment is the fact that interest will not accrue during deferment period.
Loan forbearance allows you to stop making payments for a set period of time or to reduce payments temporarily. Common reasons supporting a forbearance are poor health, personal problems which are unforeseen by the individual, inability to pay the loan, or monthly payments are more than 25% of your monthly income.
There are some situations in which you can get rid of your student loans altogether which is loan discharge. But there is a specific criterion to meet in order to do this. This only applies to certain kinds of loan and for proceeds received after 1995. In some situations only part of the loan gets canceled but not the entire loan.
But there are some circumstances in which you might be able to get your student loan cancelled such as the school in which you were enrolled closed while you were there, your school refused to refund you the money that it owed to you because you did not attend, false certification in which your school doesn’t make sure that you were qualified to attend the program, you work in certain occupations like teaching or some public service jobs, you are unable to work because of an illness or injury that is expected to continue for five or more years or result in your death.
Getting a discharge on student loan in bankruptcy is very difficult. It would need a thorough demonstration that it would be an undue hardship to pay off, and courts are very serious in that regard that debtors meet the standards.
With education being regarded as a crucial element to making a success out of life, it’s not difficult to understand why most students turn to loans as a means of payment, despite the disadvantages.
Mathew Jade is a passionate blogger and loves to write on finance and economics topics. For more updates follow @Mathew_Jade