Student loan borrowers are known to jump into the waters of debt without understanding the type of debts they are accepting or the policy changes that have changed much of the landscape of federal and private lending practices. As a result they miss on opportunities as well as pair incompatible repayment options. Let us begin with your preparations!
1.Know Your Debts — Not All Are Made Equal
A lot of student loan borrowers take the standard payment plan thinking that their payment will be put on cruise till all debt is retired. This may hold true in case all of your debt has been set up against a payment plan that uses automatic debit. Otherwise this strategy is seriously flawed.
Such a strategy does not take into account the wide variability in interest rates that exist across your student loan portfolio. This has become more common since July 1st 2013 when the government decided to revise interest rates each year based on the 10-year Treasury Bill. The result is that your portfolio may as well have several different interest rates and as a result all of your payment will get equally distributed to all the loans.
The answer to this problem is that you should implement a targeted repayment plan. Such a plan will have your payments directed at the early retirement of loans with higher interest rates. You can avail federal loan repayment options such as forbearance and an extended payment plan. Furthermore, you can apply a deferment to lower interest rate loans which will easily free up additional funds to target the higher rate debt. Though such a plan is not normally practiced due to its complexity, but little professional help can easily help you achieve substantial savings.
2. Know Your Options — Not All Will Suit Your Needs
The government as well as private lenders continuously changes their student lending programs. Unfortunately, student borrowers remain unaware of the conditions of eligibility, benefits, and the implications of pairing certain programs together for the better or worse for their financial situation. As a result, borrowers who could have easily qualified for the programs either miss on the opportunity or else fail to take the full advantage of the programs.
Examples of such options include two of the most established federal loan relief programs, the Income Based Repayment program (IBR), its enhanced version the Pay as You Earn (PAYE) program, and the Public Service Loan Forgiveness (PSLF). In brief they work as follows:
IBR — by qualifying for an IBR plan, you monthly loan payments will be limited to 15% of your discretionary income. Furthermore, the government will pay any outstanding subsidized interests three years from the date your repayment begins. Finally, any outstanding balance is forgiven if you have paid all the qualifying payments for 25 years;
PAYE — it is similar to the IBR except that the monthly payments will be reduced to 10% % of your discretionary income. Furthermore, your forgiveness period is reduced by 5 years to 20 years of qualified monthly payments. The program is limited for Fed loans that are disbursed after October 1st, 2011;
PSLF — this program provides tax-free loan forgiveness to federal loan borrowers who have made 10 years or 120 qualifying payments. With this program, the government will most likely ask of you to serve certain civil institutions which the government feels lacks quality resource, but you can still choose a great career as a lot of options are available.
Prepare yourself well. All the best!
Sources:
http://www.finaid.org/loans/RepayingStudentLoans.pdf
http://projectonstudentdebt.org/recent_grads.vp.html
