Student loans. You’ve probably heard of them. Maybe you’ve even borrowed to finance your own higher education. I know I did. I took out a combination of loans from the federal government and private institutions so I could go to law school. The idea behind taking these loans to bankroll my education was simple. I borrowed money. A lot of money. I earned my degree. I got my dream job. Theoretically, I was going to pay off my loans within 10 years or less and ride off into the upper-middle class sunset. Sounds easy, right?
Sadly, the cycle of student loan debt isn’t that cut-and-dry. Americans are facing a crushing student loan crisis, with debt swelling to epic portions. As of 2016, borrowers owed more than $1.4 trillion in student loans, and it continues to grow. Breaking that down even further, undergrads walked away with an average of $37,000 in debt.
Having taken out my own set of loans, I can offer you a valuable piece of advice: Know what you are getting into. Weigh the costs and benefits. Know the terms of your loan. Figure out if going to college or graduate school is worth the thousands of dollars you are committing to pay back once you graduate. For many people, college is the road to success and those with degrees typically earn more throughout their lifetimes than those with only a high school education.
So, if you are thinking of financing your education with student loans or already have loan debt and want to learn more, let’s discuss:
how student loans work
repayment options
loan forgiveness
postponing your payments
possible alternatives to student loans
Remember, everyone’s situation is different and you should consider consulting with a financial advisor before taking out student loans. I wish I had.
Federal Loans vs. Private Loans: What’s the Difference?
I became acquainted with Sallie Mae and her evil counterpart, Navient, the summer before law school. Being the first in my family to attend any form of higher education, I wasn’t entirely familiar with the process and didn’t have much guidance other than the financial aid office. Neither I nor my family had money set aside for school. With no savings and no possibility of an “angel donor” magically appearing in my life, I had to learn about loans. My financial aid advisor presented me with an “award” letter, and off to the races I went, racking up loans on the dream that I would be able to easily pay it off. Lawyers make a lot of money, right? Here’s what I found.
Student loans come from two different sources: the federal government and/or private institutions such as banks or other lenders. When you take out a federal student loan you are borrowing from the government. These types of loans include:
Federal Perkins Loans
Direct Subsidized Loans and Direct Unsubsidized Loans
Direct PLUS Loans (for graduate and professional students or parents)
The benefits of having Uncle Sam as your lender are numerous including lower interest rates, flexible payment plans, and income-sensitive repayment options.
Private student loans are offered through a private lender such as a school, bank or credit union, or even a state agency. They often require you to have a good credit score to qualify and can be far more expensive, may require you to begin repayment while still in school, and may not have a forbearance or deferment option (more on this later). For a detailed comparison of federal vs. private loans, click here.
Federal Loans for Undergraduate and Graduate Degrees
There are several differences between loans for graduate and undergraduate degrees. Simply put, graduate degree loans are more expensive and have higher interest rates. Moreover, as an undergraduate with a subsidized loan, you won’t have to worry about paying interest on your loan while enrolled in school full-time. Grad students, you are out of luck here, and your loans will likely accrue interest while you are still in school. These are only a few of the main differences between the two types of loans.
Repayment Options: Time to Get Serious
Once it was time to start repaying my student loans, I had to get serious and learn about my options. When my loans went into “payment” status, I was having serious sticker shock. My law school loan debt was well into the six-figure realm, and I was working as a criminal prosecutor for the government, not as a high-paid law firm associate straight out of a Grisham novel. Over the years, I’ve tried each of the repayment options to see what worked best (having a magic Student Loan Fairy would have been truly the best option, but she never showed up, nor did my angel donor for that matter). So, here’s what you need to know.
First, federal loans typically have several repayment options, but what will be made available to you depends on your specific situation. Keep in mind, this list applies only to federal student loans. Also, most experts would agree that paying down the loan as quickly as possible is ideal, depending on your interest rate and how much of a debt load you can handle. For information on your private student loan repayment options, contact your lender.
Common student loan repayment plans include the following:
Standard Plan: This is the default, 10-year repayment plan. It’s available for all federal loans. Sounds like a long time? Oh, it can be. You may have to think twice about buying that new car, signing up for expensive indoor cycling classes, or those overpriced lattes – for a while.
Graduated Plan: Here your payments are lower at first and then increase, usually every two years. You’ll pay more on the life of the loan, however.
Extended Plan: You have up to 25 years to pay off your loan. Your payments are either fixed or graduated, but again you’ll pay more over the life of the loan.
Income-Based Repayment (IBR)/Income-Contingent Repayment (ICR)/Income-Sensitive Repayment: This is a popular category. According to the Washington Post, 5.3 million people are enrolled in an income-driven repayment plan with about $353 billion in outstanding student loans as of 2016. Each plan offers lower monthly payments based upon your monthly income. Check with your loan servicer to learn more specifics.
Another recently enacted repayment option expanded under the Obama administration is the Revised Pay as You Earn (REPAYE) plan which caps borrowers’ monthly bills at 10 percent of their income and forgives the debt after 20 years of payment.
Finally, if you are like me and attended law school, some universities offer Law School Repayment Assistance (LRAP) programs if you work in the public sector.
Can’t I Just Get My Loans Forgiven?
Sure, it is possible to have your loans forgiven but it isn’t easy and they won’t disappear overnight. And forgiveness doesn’t usually apply to private student loans. There are specific eligibility requirements for student loan forgiveness, cancellation, or discharge. One of the most significant programs is Public Service Loan Forgiveness (PSLF). It’s simple. Work full-time for a qualifying public service agency (PeaceCorp and AmeriCorp service counts!). Make 120 qualifying payments (can take up to 10 years). Watch your remaining loan balance disappear. While there are other forgiveness programs you may want to look into, this one is a winner for so many talented individuals wanting to devote their lives to helping humanity through public service.
On Second Thought: I’ll Cancel that Student Loan Debt
In some situations, you may be able to cancel your student loan debt. Here are a few scenarios:
College Closure: Your school closed down while you were a student there or within 90 days after you withdrew.
Criminal Activity: Someone stole your identity and took out loans in your name.
Death: If you die, so does your loan. Morbid thought, but true.
Refund Owed to You: Your school owed you or your lender a refund after you withdrew but never provided it.
Total and Permanent Disability
Postponing Repayment: Forbearance and Deferment
Since I wasn’t able to claim crime victim status, cessation of life, or any of the others listed above, I considered postponing my monthly payments. If you aren’t able to make timely payments either because you are unemployed, underemployed (read: not making enough dinero), having medical issues, are enrolled in school at least half time, or simply don’t want to sell one of your vital organs for harvesting on the Dark Web, you have options; namely, postponing your payments either through forbearance or deferment.
First step, contact your student loan servicer immediately. The last thing you want is to go into default (default occurs when you fail to make a payment for 270 days). Here are some of the consequences:
Seizure of your tax refund
Garnishment of your paycheck
Collection of part of your federal benefits (such as your Social Security check), pursuant to the Debt Collection Improvement Act (DCIA)
Once you contact your loan servicer, ask if you are eligible for either forbearance or deferment. Some private lenders will not allow either, but it is always a good idea to know your options.
Forbearance
Forbearance lets you temporarily stop your monthly payments under certain circumstances. But don’t be fooled — interest will continue to grow on both unsubsidized and subsidized loans, which may be added to your principal balance.
Deferment
Deferment, if available for your loan, is the way to go if you are temporarily unable to make timely payments. In deferment, your payments are postponed without damaging your credit rating or accruing interest on subsidized loans.
Alternatives to Student Loans
Despite the doom and gloom you are reading here, there are ways to pay for college without giving away the keys to the castle. For undergraduates, you can consider going to a nearby community college for the first two years and transferring afterward. Scholarships are always options, albeit never a guaranteed money source. If you are working, some employers offer tuition reimbursement. You could also sign your parent up to work at the college. Many schools offer reduced tuition to the children of employees. You could get ready for boot camp and join the military, later receiving the benefits of the GI Bill.
Those are but a mere short list of options. There are others I haven’t mentioned here. If none of these work for you, you can do what I am doing: waiting patiently for my magic Student Loan Fairy. I’m sure she’s on her way. Really! It is entirely possible she will be there right after Santa Claus slides down my chimney with a blank check, the Easter Bunny hops on over with a valuable egg I can trade in for rare coins, Bernie Sanders storms the White House staging a coup d’état and forgives all student loan debts, and/or a leprechaun meets me at the end of a rainbow in a breezy meadow with a pot of gold. Hey, stop ruining my fantasy. I can dream, right?
Student Loans: Related Resources
About the Author
Gina Scialabba is Senior Legal Writer and Editor for Thomson Reuters (TR) in the Bay Area. She was recently appointed to a seat on TR’s LGBTQ Global Leadership Team, where she works diligently to help shape her company’s LGBTQ diversity and inclusion policies and practices world-wide. (Thomson Reuters was recently named one of the Best Places to Work in 2016 through HRC’s Corporate Equality Index). Gina is also a California attorney whose former life included fighting crime in the courtroom (as deputy district attorney) and defending individual’s constitutional rights (as a criminal defense attorney…Think Ex Posto Facto, Right to Remain Silent, Right to a Speedy Trial, and all those crime shows you secretly love to binge-watch. Yep, that was her job).
About the Editor
Steve Tanner, Senior Legal Writer, Core Content, Thomson Reuters.