Understanding Student Loans and Educational Debt
While you may have lived off student loans for years, you may not have fully understood them. If that’s the case, you’re not alone. There are many types of student loans — both private and federal. Here’s a basic breakdown:
- Federal student loans: All federal loans come with fixed interest rates, which keeps your rate the same through the life of the loan. Subsidized and unsubsidized student loans will have the same interest rate. Unsubsidized loans and Direct Plus loans for graduate and professional programs will have higher interest rates. All student loan interest rates are annually set by Congress. Federal loans offered to undergraduate students include:
- Subsidized federal loans: For those with exceptional financial need. Interest is subsidized as long as the student is enrolled part-time. They come with a six-month grace period after leaving school before payments are due.
- Direct unsubsidized loan: Interest begins to accrue as soon as you receive payment.
- Direct consolidation loan: Designed to simplify paying off federal student loans by consolidating two or more federal loans into one with a fixed interest rate.
- Private student loans: Issued by financial institutions such as banks or credit unions like DCU, private student loans have some benefits when compared to their federal counterpart. Those who have excellent credit could be paying a lower interest rate on private loans than on federal student loans. Private student loan interest rates can be fixed or variable. The loan term is often more flexible than federal student loans, offering a 20-year repayment period rather than the standard federal 10-year repayment term.
- Parental loans: Parents can access Direct Plus Loans. These are federal loans designed for the parents of college students, allowing them to borrow the total cost of college. These loans will have the same interest rate as standard federal student loans.
- Whether you’re the lender or the student, it’s smart for family members to draw up a repayment plan to limit the danger of a familial student loan getting in the way of a happy family dynamic.
Tips on Getting the Most out of Your Student Loan Repayment Terms
Everyone is in a different boat when they leave college. Some graduates might spend a year or two making a pittance as they build their careers. Some may be jumping into well-paying jobs. That’s why there’s no payment plan that’s universally the best fit for everyone.
Here’s a look at the federal payment plans that are available, and a simple breakdown of how these payment plans work:
- Standard Repayment Plan
- This is the default federal student loan repayment plan.
- Equal payments over a period of 10 years.
- Works for those who earn more per year than they owe in student debt.
- Extended Payment Option
- Works for those who aren’t planning on applying for public service loan assistance and need more time to repay their loans.
- The repayment plan has a $50 minimum monthly payment and has an even payment schedule over 25 years.
- Income-based Repayment Plans
- There are four variations of income-based repayment plans: REPAYE Plan, Income-based Repayment (IBR), Income-Contingent Repayment (ICR) and Pay As You Earn (PAYE).
- Graduated Repayment Plan
- This is an income-based repayment plan.
- It has a 30-year term for direct consolidation loans.
- Payments start low and adjust as your income rises.
- The minimum payments adjust each year.
Loan Forgiveness
You might also consider exploring student loan forgiveness programs. Student loan forgiveness means that you will no longer have to pay all of or a portion of your loan. You might also hear the term “discharged” or “canceled” but they’re basically the same thing based on different factors.
If your loans are forgiven or canceled, it’s likely due to something you’ve done such as volunteer work or your career path. If your loans are discharged, extenuating circumstances have occurred that are beyond your control to make it unrealistic to pay back the loan such as permanent disability, bankruptcy or death.
Here are the three basic types of student loan forgiveness. If you meet any of the requirements for loan forgiveness programs, you’ll want proof of your eligibility before you apply. It’s important to be aware that forgiven loans may be taxable as income.
- Time-based: Borrowers may be eligible for forgiveness after making 240 or 300 monthly payments under the Higher Education Act.
- Income-based: Income-driven repayment forgiveness notes your family size and discretionary income and bases your monthly payments with that in mind. At that point, your payment term will be extended to 20 or 25 years. At the end of that term, the amount you haven’t paid off may be forgiven.
- Career-type based: Those with careers in public service may be eligible for student loan forgiveness. Teachers, nurses and lawyers working in the nonprofit sector are common examples of this. This path to loan forgiveness requires commitment. Those who qualify need to be able to prove they have continually provided services in a high-need, low-income area.
Refinancing and Consolidation
If you find it difficult to keep track of your student loans, private student loan debt consolidation may be a good way to make sure you cover your bases and make all your loan payments on time. Refinance and consolidation loans typically come with variable and fixed-rate options. Check out DCU’s student loan consolidation options to understand more about how the process works.
Those with student loans should be aware of the ongoing prevalence of education refinancing scams. Typically, a company or individual tries to convince a borrower that if they pay the company or individual a large, one-time payment, their student debt may be discharged. Scammers may also try to get borrowers to send them their student loan payments rather than sending them to their assigned loan officer.
Companies may claim to be able to negotiate a student loan debt settlement, saying they will represent you in a lawsuit against the student loan company or discharge your student loans through bankruptcy. These companies are not to be believed. Be on the alert whenever a company asks for your social security number, or for a payment to provide quick and easy student debt relief.
Avoiding Debt Pitfalls
Try to avoid these common missteps to ensure your student debt doesn’t get out of hand:
- Making Minimum Payments: Minimum payments ensure you won’t go into forbearance, but making minimum payments only will cause interest to balloon.
- Know the difference between loan deferments and forbearance:
- Deferments: Loan deferments are a pause on your loan. When your loan is deferred it is not accruing interest.
- Forbearance: Loan forbearance is also a pause or reduction in your repayment obligations, however, interest will still accrue during the forbearance term.
Both deferments and forbearance are only offered when requested. If you are having trouble making payments, don’t wait. Talk to your loan officer and see how they can help.
Tools and Tips for Reducing Student Loan Debt
Many students don’t realize loan interest begins accruing the moment they receive the money. If you’re still at university, consider starting your payments now. If you pay the interest off each month, you’ll be facing a less intimidating amount of debt when you leave college and set up your repayment plans.
Most college students don’t worry about their loans until out of college and reaching the end of the six-month grace period. However, If you’re proactive, staring down reality and wondering how to reduce student loan debt, here are some ideas to make your loan repayment more manageable.
Create a Budget
Leaving college means that you’re starting a new life. This new life might call for new habits. Create a budget to find money to put aside to pay off your loans. This budgeting habit can be applied to countless goals once your student loans are paid off. Embracing the budget now, while you’re facing this new beginning, can set you up for a healthier financial future. Here are some steps to take to start living on a budget:
- Take a hard look at your monthly expenses to understand your spending habits.
- If you understand where your money is going every month, you’re more likely to find areas where unnecessary spending can be cut.
- Catch yourself before you spend with small acts of mindfulness. Whether you’re turning down lunch out on a workday, or a trip out of town for the weekend, saving an extra 20 to 30 dollars a week can go a long way toward paying down your loans.
- Put money aside in a member-described savings account labeled with what you’re saving for. In this case: Student loan repayment. Reward yourself when you turn down invitations to spend money by transferring the money you saved right away and watching your savings grow.
Boosting Payments, Reducing the Burden of Debt
If budgeting starts working for you and you are able to save more money each month, it’s possible that you’ll have enough to start boosting your loan payments. The more you’re able to pay ahead, the less interest you’ll pay in the end. The question is, where should you focus those extra payments?
There are two frames of thought when it comes to reducing debt. The right choice depends on your frame of mind. There’s no right or wrong way.
- The debt avalanche method: When you pay off loans in this way, you focus on paying off the highest interest rate loans first, cutting down on the interest that you’ll have to pay in the future.
- The debt snowball method: When you pay off using the snowball method, you’ll focus on paying off your smallest loans first. This way, you’ll find motivation as you watch your loan shrink.
While the avalanche method technically saves borrowers more money, many people swear by the snowball method as it keeps them engaged in paying off their debts, rewarding them with small triumphs.
Always be on the lookout for ways to boost your payments. Bonuses, tax refunds and windfalls of any sort can be directed to your loan repayment. Many people also work side hustles — from dog sitting to online tutoring in the evenings — to set aside extra money for payments. Speaking of work, some employers will help pay off your student loans. Consider bringing this to the table during job negotiations or pursuing work that offers student loan help in their benefits package.
Extra payments can be made on a bi-weekly basis or by making one single additional payment when able. However, you should be certain to instruct your student loan servicer that this extra payment is to be applied to the principal. Otherwise, an extra payment may be interpreted as an early payment and the next month’s due date will simply be pushed out. Early payments won’t cut down on the interest you’ll have to pay on your loan.
Use Student Loan Tax Benefits
If you paid student loan interest, you could be eligible for a tax deduction up to $2,500. Here are the requirements you must meet to be eligible.
- If you are a married person, you’re filing jointly
- You are not listed as anyone else’s dependent
- You paid interest on a qualified student loan
- You are legally obligated to pay interest on a qualified student loan
- Your modified adjusted gross income level or MAGI is under $85,000 if you’re filing independently and under $175000 if you’re filing jointly.
People with student loans will usually benefit most from a standard tax deduction. However, if you’ve experienced a large life event such as buying a house or becoming a parent, it might be better to itemize your deductions.
Maintain Momentum on Reducing Your Student Loans
When aiming for any financial goal, it’s easy to get bumped off track when you hit financial hurdles. Maybe you go wild during the holiday season and forget about your savings goals. Maybe your car breaks down and your budget gets a little tighter for a few months. Whatever the hurdle might be, beating yourself up for not working toward your goal won’t do any good. Take a deep breath. This is a process. You’ve got this. Here are a few ways to maintain momentum in your student loan debt reduction journey.
- Maintain Your Well-being: Debt has a way of getting you down. Recognize the importance of your mental health as you work toward your goal to achieve a financially healthy future.
- Seek Guidance: A little expert advice can go a long way. Members of non-profit credit unions like DCU can often rely on financial help and education. See if DCU membership is right for you. Check out the saving programs that DCU provides to members.
- Staying Proactive and Updated: Staying on top of news about student loan forgiveness both federally and at the state level can ensure that you’re ready to take action should opportunities for forgiveness or reduction arise.
- Keep Your Head Up: You’re saving for a reason. Every action you take toward debt reduction will lighten your financial load.
Lighten Your Load With DCU
We hope that these tips for reducing student loan debt will help guide relief. DCU has offered financial education and guidance to its members since our inception in 1979. We offer tools and services to keep our members on track as well as guidance for those that need help.
Are you interested in banking with an institution with your best interests in mind? Find out if DCU membership is right for you.
Please note, membership is required to open a DCU student loan. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
