A journey of a thousand miles begins with a single step -Lao-tzu Chinese philosopher (604 BC - 531BC)
So, you’re out of school for whatever reason and repayment is knocking at your door. Now what? What’s next? I am sure at this point you may be wondering what your payments are, or how you are going to pay them. Some of you may be wondering how can I afford them considering I haven’t found a job? What do I do now?
That is where this blog post comes in. I hope I can help you navigate the complexities of the student loan system. So what are your next steps? Here is what I would recommend you do.
As a disclaimer though, I am not a financial counselor, planner, or certified in any shape, form, or fashion. I am however highly involved in the student debt crisis movement. I speak to people daily who are struggling and will be struggling with the same issues you are now struggling with. I also struggle with the issues you either are or will be struggling with. In that respect, I am speaking from experience of all the people I speak with and my experience. So without further ado, here are my recommendations.
1. Stop. Breath. Go to your happy place.
Just know that things will be ok. To do this you need to be methodical and thoughtful. You will not be able to navigate this if you are panic stricken or unable to think clearly. Also realize, you’re not alone in what you are going through. As it currently stands, over 38 million borrowers hold in excess of 1.1 trillion dollars of student loan debt according to the Federal Reserve. That said; you’re not alone.
2. Understand your loans. Are they federal or private?
Depending on the kind of loan you have, payment plans and payment assistance is available to you. The obvious question is, where can I find this out? So through the magic of the World Wide Web, visit national student loan data system. This system is the national database for the department of education. It holds student aid information. It holds the information for the vast majority of federal loans. Any loan you have which isn’t in this database is a private loan most likely. One other question to ask yourself is, do you have a co-signer? If you answered yes to that question, then most likely your loans are private loans. That is because federal loans do not require a credit check and thus no co-signer in case of default. Every citizen in the United States is entitled to a certain amount of education funding via federal loans. More information for federal loans, how to get them, and maximum award levels can be found here. Once you know this information you can begin planning for how you are going to tackle your loans.
At this point, just know that staying calm and understanding where you are is half the battle. From this point forward, your repayment options will depend on the type of loans, who your lender is, and most importantly what is happening in our political system that will force your lender or servicer to change. Keep in mind, you can always ask your lender or servicers what kind of loan you have; however, you may not always be told the truth. A little legwork on your own will go a very long way. At this point, do as much as you can yourself and rely on your lender or servicer as little as possible.
3. Understand your options and discover what your minimum payment is.
The servicer, a company who is acting as a middle man between you and the lender, will be able to tell you what they will be charging you on a monthly basis for each of your loans. With that piece of information known, it is now time to understand your options.
If you have federal loans, a breadth of options will open for you. These options can be found at the federal student aid website. Some of these options include: standard repayment plans, graduated repayment plans, extended repayment plans, income based repayment (IBR), pay as you earn, income contingent plans, or income sensitive plans. This also includes the standard forbearance and deferment options that come with both federal and private loans.
So now don’t panic because yes that is a lot of different plans. Each one of them are different in its own way with its own pluses and deltas. Don’t worry; I am going to help you with basic information. Just knowing they exist is the challenge. Your servicer will not tell you many of these exist. They want you to pay as much as you can. So at this point, knowledge is your best weapon.
If your loans are private, meaning they are from and through banks and not the department of education, then your options are extremely limited. Each lender and servicer has their own options that you can use. For example, I have a loan through Chase. In order to receive forbearance I have to make 9 consecutive payments. Forbearance only comes in one month increments that can be removed anytime by my lender. In my experience thus far, I have only seen a few options for private loans. My loan for example, only has the option for forbearance. These are forbearance, deferment, or the graduated repayment plan. I strongly suggest checking with your lender or servicer then verifying via their website.
I have mentioned it a couple times already but when dealing with lenders or servicers always take the stance trust but verify. Document everything you are told, given, or mailed. You should keep everything that has anything to do with your lender. It will save you headaches. That I can promise.
Finally, bankruptcy in either case federal or private isn’t an option except in rare circumstances. The only way to bankrupt student loans as of this June sixth 2013 is to declare “undue hardship” via the Brunner test.
I strongly recommend if you have a federal loan and qualify for the IBR program then use it. In my experience so far, this is the best plan for federal loans and by far the most helpful. The income contingent plan is also a plan I have heard good things about and worth checking into.
4. You know your loans, your options, and now budget
This part is very touchy because personal finance is a topic that most people feel they may have a grasp on. It is not my intent to insult your intelligence; however, it’s something that we all need to know. In essence, you need to now understand what do you have coming in, and what is going out. You have to manage these two as much as possible. It’s hard but you can do it. You just have to learn to tell yourself no and keep pushing forward. The way I do it, which I can expand on in another post, is to create an excel spreadsheet that has my payments that are due with how much they are, my paychecks as they come in, and which paycheck it will be applied to. The example below isn’t perfect but you get the picture. What comes in, what goes out, and how much is left over. There are many different ways to do this but for me this seems to work. It’s not a perfect example, I like I said but it’s an idea.
Once you have a budget and know your options it’s all about tackling the loans. You will be on the right track with these four steps; however, I want to leave you with a thought. As I said a couple times, you’re not alone. From this point forward you’re going to experience interest rates that would make the mafia jealous and people like Bernard Madoff salivate knowing a payout is coming. I strongly suggest finding an organization of people who are experiencing these same issues and get involved with them. The two largest I have seen so far is Student Debt Crisis and The Young Invincibles.
I personally am part of Student Debt Crisis. We are a group of political activists trying to reform the higher education system. There are members in our group who have loans ranging from the multiple hundreds of thousands down to zero. The group is not only about activism but also a support group for people who are trying to find information and learn about their loans. It may help you as you begin this journey to have people alone the way who are in the same boat as you.