Depending on how much money people borrow to attend college, they could end up with a lot more student debt than they anticipated.
Fewer than 25% of people with student debt are repaying their principle (the amount originally borrowed) says Education Secretary Betsy DeVos.
This is happening because their monthly payments are just going towards interest which is accumulating on their debt or they’re not paying anything at all.
In the meantime for most of these people their debt is still growing.
Student debts commonly double, triple and quadruple. There are many examples of people who borrowed amounts like $55,000. In the 90’s who now owe over $300,000 because they struggled to find work after school.
How Student Debt Accumulates
Your student debt can accumulate for several reasons.
If you borrowed an unsubsidized, Federal student loan for $50,000 with a 5% interest rate, interest begins to accrue on your debt before you finish school. Typically loans have a 6 month grace period after graduation in which the borrower is not obligated to make payments. However, during this time interest is still accumulating. Which means before you even graduate your debt has grown to $56,458!
What to Do About It
To prevent your student debt from growing it helps to make interest-only payments while in school and during the grace period. If your loan is subsidized the government will pay the interest on your loan while you are in school and during your 6 month grace period. However, if you loan is private or unsubsidized you need to pay the interest during these times if you do not want your student loan debt to increase.
Some lenders, like Sallie Mae offer discount on interest rates if the borrower makes payments while still in school. It would be helpful to contact your loan servicer for advice on making proactive payments.
If you have a hard time finding a job after graduation you may be eligible to postpone your student loan payments. By filing for “economic hardship deferment” you can delay your payments for up to three years. The downside is, you would add three years of interest to your debt total bringing it up to $64,927.
Again, if your Federal student loan was subsidized interest would not accrue during an economic hardship deferment. However, if you loans are unsubsidized you should research options that would make your bill easier to pay before opting for a deferment.
There are also income-driven repayment options. For some people who struggle to find work after graduation their payments can be as low as $0. During this time, if you have deferred your payments you should still pay the interest so it does not continue to accumulate.
Another option for taking a break from student loan repayment is by putting your loans into “forbearance.” However, both subsidized and unsubsidized loans accumulate interest during this type of postponement. So if your $64,927 debt was in forbearance for three years, another $9,739 would be added to the total bringing it to $74,666.
If your loans are subsidized it would be in your best interest to note if you’re eligible for a deferment before seeking forbearance because there would because of the difference in interest.
If your loan is unsubsidized a better option would be the income-driven repayment plan if you cannot afford your payments.
Making irregular payments is also an unwise financial move. When you only make payments here and there, you only pay towards interest, never tackling the principal amount. Your balance can increase during this time, and the same loan that started at $50,000 can reach up to nearly $80,000 because of interest rates.
To save money and time paying back your loan, research repayment plan options and find one with a monthly amount you can afford. Automate the payments so you never miss a payment. The Department of Education has a calculator on it’s website where you can enter your salary information and learn your options.
Do Not Ignore Student Debt
Ignoring your student loan debt is one of the worst mistakes you can make. Your debt will grow considerably during this time, becoming even more cumbersome to pay off.
If you consider “consolidation” or “rehabilitation” choose cautiously. These are helpful options for borrowers to rescue their debt from defaulting but often come with large fees.
After interest, collection fees and in some cases late charges, a borrower could see their debt nearly double after a rehabilitation. Also, most people who go through this process default again which makes their debt balance skyrocket even more.
If you are a student loan borrower and are struggling to make your monthly payment, you should immediately contact your loan servicer. Most often they will provide you an income-driven repayment option so your payments are comparable to your income.
Student debt can be difficult to manage but it’s not impossible. Borrowers should consistently make payments even if they are not paying towards principal so that at least the interest does not accrue and explore options for reducing payment sizes by contacting their service lender.
If you need more help, click here for student loan advice.