Consumer IQ

The Great Student Loan Debate: Part 2

student loan debt

This is the second installment of a 2-part series on student loans. You can read the first segment here. 

As some elected officials rush to hash out a last-minute agreement to prevent the interest rates on some new student loans from doubling next weekend, millions of Americans will struggle to make the payments on student loans they took out years, and even decades, earlier. While the interest rate hike, if it happens, won’t impact old student loans, the potential change has shined a light on the overall student loan debt problem in America.

But what some borrowers don’t know, is there are relief programs available to help them pay off their loans without resorting to eating ramen noodles every night AFTER you leave the dorms.

Deferment, Forbearance, and Interest Rate Reductions

The first stop to get some loan relief is to talk to your lender. If you have private student loans, as 13% of student loan recipients do, you can negotiate with the banks to try and lower or freeze your interest rate, which will hopefully bring the payment down to a more manageable level. If you have federal student loans, you can talk with your lender about applying for a deferment or a forbearance for a few months, or until you get back on your feet.

A deferment is a temporary suspension of loan payments for specific reason, such as re-enrollment in a university, military deployment, unemployment, or economic hardship. The student loan lenders are usually helpful with this application process and, under certain circumstances, can grant deferments over the phone.

You should note that if you are delinquent in your payments, your deferment will be backdated to the date you became delinquent, not on the day you receive the written or verbal deferment from the lender. Deferments usually last six-months, but you can apply for another one after the original expires of your situation hasn’t changed.

Forbearance can be granted if you are ineligible for a deferment. But unlike a deferment, interest will accrue during the time of your forbearance, no matter if your loan is subsidized or unsubsidized. That interest will be capitalized, meaning it will be added to your total loan debt, so you will end up paying interest on that interest once you start repaying your loan. For more information on deferments and forbearances, contact your lender.

Student Loan Consolidation

Consolidating or combining your loans is another way to cut, extend, and simplify your payments. Borrowers who have multiple federal student loans can smash them together into one big loan with one set interest rate. They can then extend the payments anywhere from 10 to 30 years. This will mean that you pay more interest, but it also makes your payments more manageable.

Before you consolidate, compare the interest rates on your various loans with what the consolidating lender is offering. If the interest rate is lower on your current loans, then it doesn’t make much sense to consolidate at a higher interest rate.

For a long time deferments, forbearances and consolidation were the only forms of relief available to struggling borrowers. That’s because, unlike other types of debt, it is very difficult, if not impossible, to get your student loan debt wiped out in bankruptcy. And thanks to an overhaul of the bankruptcy code in 2005, you can’t even get your private student loans wiped out, either. Some lawmakers are trying to change that, but it might be a long shot, for now.

The Relief You Probably Aren’t Taking Advantage Of

In 2009, the government enacted a plan that would make it a lot easier to pay down your student debt and even have it forgiven. The College Cost Reduction and Access Act (CCRAA) is a comprehensive program designed to get students to pay down their federal student loan debt, while still living normal lives.

This not only helps the economy, as the money that is not going to service debt flows into goods and services, but also provides an arguably better alternative to deferments and forbearances, as it allows the borrower to chip away at their debt load, just at a measured pace.

You might have heard about the program, but chances are you aren’t taking advantage of it. It turns out that only 2% of borrowers are enrolled in the program, a ridiculously low number considering how little new grads make these days – if they are lucky enough to actually land a job.  The trouble is, the program is simply unknown or misunderstood by many borrowers as it is relatively new.

The CCRAA basically enables ANYONE with certain federal student loans to pay down their debt load on a sliding scale based on their income. For most eligible borrowers, payments will come out to around 10% of their income. For borrowers with very low incomes the payment can actually be reduced to nothing.  There is an income cutoff to enroll in the program, but a good rule of thumb is that if your total debt exceeds what you make in a year, there is a good chance you quality.

What makes CCRAA different from deferments and consolidations is that after you make 120 qualifying payments (10 years) you can be eligible to have the rest of your debt forgiven by the government. You are eligible for the 120 payment forgiveness if you work for the government or for a qualifying non-profit organization that has been designated as tax-exempt. You can also be eligible if you work in any number of public service jobs that don’t fit either of those categories, like public interest law services.

But, say you work a job that still doesn’t qualify, you can still get forgiveness, but only after making 300 payments (equal to 25 years). That might seem like ages from now, but if you work a low-paying job, it can be a Godsend.

There are options to get your student loan payments under control so consider them all before you skip a payment. Who knows, you may already be on your way to total loan forgiveness!