How to Reduce Student Loan Debt

• By Tracy
• Also try: Student Loans

Introduction

• Average student loan debt for the Class of 2006 reached $21,000 per graduate, an increase of 8% from the previous year (while salaries grew only half as much). Generally easy to get and seemingly "justifiable debt" (it's not like you're buying an enormous flat screen tv on your almost-maxed out credit card), educational loans are still causing serious struggles among new graduates.

• Not unlike the subprime mortgage crisis, the student loan industry has come under criticism for misleading students about the realities of repayment amidst soaring interest rates. As college costs continue to rise, however, students are taking out bigger and bigger loans, topping $78 billion during the last academic year. If you are one among many former students trying to reduce your existing student loan debt, there are steps you can take to lower your payments and reduce your overall debt. Read on to learn the specific steps to handling your debt intelligently.

Step 1: Assess Your Debt

• Your first step in reducing debt is understanding it.

1. Ask yourself the following questions before proceeding:
   1. Are your loans federal loans or private loans? (i.e., Were they issued to you from the government or a private bank or lender?) To learn more about specific types of loans, go to FinAid's student loan explanations.
   2. Note that your federal loans are generally fixed at a relatively low rate, while private loans calculate interest using a variable rate that depends on your credit and current rates.
   3. What kind of loans do you have, e.g., Stafford, PLUS, Perkins? Are your loans subsidized or unsubsidized? (A subsidized loan, which is need-based, does not require you to make interest payments while you are in school. On an unsubsidized loan, interest accrues while you are in school whether you are repaying the loan yet or not.)
   4. How much debt do you have? Across how many lenders?
   5. Are you currently in a grace period before repayment begins?
   6. What is your repayment period (i.e., are you scheduled to pay off your loans in 10 years? 15?)
   7. What interest rates are you currently paying on your loans?
2. To learn more about your individual federal loans, you can go to the National Student Loan Data System and look up your loan information using your social security number and other personal information. Before accessing this info, however, you'll need to sign up for a PIN number if you don't have one already.
3. To understand the differences between federal loans and private loans, go to the Student Loan Borrowers page about understanding student loans.
4. Another great resource for understanding your student loans is Simple Tuition, which not only provides detailed information about various loans and their options but allows you to comparison shop for consolidation offers or new loans.
5. Research your private loans on your lender's website (almost all lenders will allow you to manage your account online with a user name and password), and bookmark the site for future reference.
6. Once you've collected all the pertinent information, use FinAid's student loan checklist to keep your various loan details organized and in one document.

Talk to a Professional

• Before embarking on the journey that is reducing your student loan debt, it's best to consult a professional.

1. If you have federally issued Direct loans, you can get advice about your individual options through the Federal Student Aid site. Get online student loan help and access account information.
2. You may also want to talk to a financial aid counselor at your school, even if you graduated a long time ago.
3. For privately issued loans, contact your lender and ask to speak with an advisor. Even a customer service agent should be able to provide you the details about your loans and any options for changes in your interest rates or repayment schedule.
4. And whether you do your own taxes or have them done by a professional, you may want to talk to someone about making sure you are deducting your student loan interest accurately.

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Step 2: Consider Consolidating

• One way to reduce your monthly payment and lower your interest rate is by consolidating to one lender who will give you a fixed rate for your loan.

1. Consolidating your loans means you are grouping together your different loans and locking them in at a new, fixed rate. It's a lot like refinancing a mortgage.
2. Consolidating your loans means that if rates go up, yours will stay put. Alternatively, if there is a sharp dip in interest rates, you will still be paying the same fixed rate.
3. Consolidation loans are available for most federal loans, including FFELP loans (which include Stafford, PLUS, and SLS loans), FISL, Perkins, Health Professional Student Loans, NSL, HEAL, Guaranteed Student Loans and Direct loans.
4. There are also private consolidation options available for private student loans.
5. To better understand the ins and outs of consolidation, see Simple Tuition's Guide to Student Loan Consolidation, which will open as a PDF file.

Consolidating Federal Loans

1. Evaluate the pros and cons of consolidation with your particular loans in mind.
2. Note that you might pay more overall when you consolidate because you are extending the life of the loan (even if monthly payments are lower).
3. You'll also need to decide if consolidating all your loans is a good idea, or if you should just consolidate some of them. Because your rate is determined as an average of your current rates, you may want to keep a higher rate loan out of the equation if you feel you can continue to pay it off.
4. Calculate what your consolidated rate would be to determine if it's worth consolidating. Try calculating your rate without including some high interest loans to decide if you should consolidate all or some (or just one) of your loans.
5. To determine your consolidation rate, a lender will calculate a weighted average of your current loan rates and then round up to the nearest 1/8, but not to exceed 8.25%.
6. Calculate your potential consolidation rates using FinAid's consolidation calculator.
7. Your interest rate also depends on the type of federal loans you have and when you took them out.
8. You can also lock in a lower consolidation rate by consolidating during your grace period (the several months immediately after graduation, during which most lenders will not force you into repayment). Consolidating during your grace period, while ultimately helpful because your interest rate is lower, does force you into immediate repayment, even if you still had a few months left before scheduled payments were to begin.
9. Note you cannot consolidate loans if you are currently in school.
10. It is not recommended that borrowers consolidate federal loans into a private loan because you will lose important privileges to defer, apply for a forbearance, or qualify for loan forgiveness under government programs.
11. And under no circumstances should you pay a fee to consolidate your federal loans.

Consolidating Private Loans

• It is possible to consolidate private loans, and this may be worth doing if your credit score is higher now than it was when you took out the loan.

1. You may be able to consolidate your loan with your original lender. It might be best to start there to see what rates may be available to you.
2. If your lender is not offering a consolidation rate that is appealing, you'll need to comparison shop to find the best consolidation offer.
3. Note that private consolidation loans are based on your credit score, and/or that of your co-signor's.
4. Be sure to research any associated fees before you determine that it is financially advantageous to consolidate your private loans.

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Step 3: Evaluate Repayment Options

• The terms of your repayment can be significantly varied.

1. Your options for repayment generally shift based on two factors: the life of the loan and the ratio of principal to interest in each payment.
2. Federal repayment options include:
   1. Standard payment: Standard payment is the payment schedule every borrower is automatically assigned. (FFEL borrowers have 45 days to switch from this plan after being notified by their lenders to choose a repayment plan.) Standard plans have the highest monthly payments because the terms are between five and ten years, which means you may pay less on your loan overall. Note that your monthly amount due may fluctuate if you have a variable interest rate.
   2. Extended payment: If you have total outstanding student loans that exceed $30,000, you may repay your debt on a fixed or graduated payment schedule for up to 25 years (most repayment plans are within the 10 year range). Because you're extending the term of the loan, your monthly payments will be quite a bit lower, but you will pay more in interest over the life of the loan.
   3. Graduated payment: Graduated payment is exactly what it sounds like, with payments starting out low and gradually increasing during the repayment period. Graduated plans are helpful for borrowers who are just beginning their careers and are more likely to have higher incomes over time.
   4. Income based payment: There are two types of income based payment plans depending on the type of loan you have. If you have FFEL loans, your monthly payment is based on your expected total monthly gross income. If you have Direct loans, you can qualify for very low payments (even zero payments) based on your income. Payments increase as income increases, but your required payment can be no greater than 20% of any earnings above the poverty level. With either of these options, you will need to provide financial information including tax returns to your lender. There will be a new income-based program in July 2009 that will use a sliding scale.
   5. Perkins loan payment: Perkins loans function differently than other federal loans. The government establishes a consistent minimum payment per month, which is currently $30 for an NDSL loan or a Perkins Loan made before October 1, 1992 and $40 after that date.
3. Note that private loans are not required to offer these same options. While private lenders may offer deferment options, you will need to read the fine print of your contract to determine what the possibilities are.
4. See examples of the different monthly payments and total amounts paid for the repayment options above at the Student Loan Borrower Assistance page on repayment options.
5. Then use FinAid's loan calculators to assess the differences between repayment plans.
6. Depending on your income and other financial factors, choose the repayment plan that best suits your needs and that will cause you to pay as little total interest over the life of your loan.

Prepaying Your Loan

• If you happen upon a major windfall, it might be a good idea to get ahead on your loan payments.

1. With federal loans, there is never a prepayment penalty. Extra payments are applied to interest first and then to principal, unless you indicate that your extra payment should be applied to principal.
2. Although private loans are not required by law to be prepayment fee-free, all are for competitive purposes.
3. Be sure to write a note indicating your wish to apply an extra payment toward your principal instead of advancing the due date of your next payment.
4. It makes sense to pay the loan with the highest amount in interest first and then the next highest, etc. In general when paying down debt, you'll start with credit cards, then private loans, then PLUS loans, then Stafford loans, and finally Perkins loans.
5. See FinAid's prepayment calculator to determine how various prepayment methods will change the term of your loan and total interest paid.

Step 4: Pay on Time, Every Time

• Lenders will reward you for consistent on-time payments.

1. Sign up for auto-pay to have your monthly payment automatically deducted from your bank account. Just make sure you will always be able to cover the payment on the day it is due.
2. Some loans will allow you to shift your due date (i.e., if you normally have a payment due on the 22nd of the month, you could ask that it be changed to the 1st) so that you can coordinate income with payments.
3. Some lenders will give you a rate cut if you make a certain number of payments on time. In 48 straight payments, you will often see a rate discount. The Project on Student Debt warns, however, that it is extremely difficult to make that many consecutive payments on time without changing your repayment option, and that just one late payment even after you've earned this discount can allow your lender to suspend it. Use FinAid's loan discount calculator to assess the benefits of any potential discount.

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Step 5: If You Can't Pay

• If it is simply impossible to meet your monthly demands and stay afloat, there are a few options.

1. If your loans are backed by the federal government, you have more repayment options, many of which are more forgiving of lower income borrowers.
2. If you have federal loans that are currently sourced through a private lender, try to switch them to a direct loan to avoid soaring variable rates.
3. You may also qualify for loan forgiveness if you are employed by one of the following programs (note amounts listed are to be applied against student loan debt and are not received as cash):
   • • Peace Corps: Volunteers may apply for deferment of Stafford, Perkins and Consolidation loans and partial cancellation of Perkins Loans (15% for each year of service, up to 70% in total).
     • Americorps: Serve for 12 months and receive $4725 to be used towards your loan, plus a living stipend.
     • VISTA: Complete 1700 hours and receive $4725.
     • National Guard: Students who are in the Army National Guard may be eligible for their Student Loan Repayment Program, which offers up to $10,000.
     • Teaching in an underserved area: Students who teach full-time in an elementary or secondary school that serves students from low-income families can have a portion of their Perkins and Stafford loans forgiven. Additional loan forgiveness programs for teachers vary by state. See the American Federation of Teachers' resources for teachers seeking loan forgiveness.
     • Graduate students who become doctors in an underserved area or lawyers in the public interest sector may also qualify for loan forgiveness. See FinAid's extensive list of loan forgiveness programs, some of which offer eligibility to students living in particular regions or states, to see if you qualify for any loan forgiveness.
4. The following are ways to reduce your monthly amount owed if you are having a hard time paying:
   1. Deferment: most federal loans and some private loans will allow you to cease paying if you are a continuing student in school at least half-time. You may also qualify for a deferment due to economic hardship or an due to an extended physical disability.
   2. Forbearance: If you are suffering an economic or personal hardship that is affecting your ability to make your loan payments, you may request a forbearance. Forbearance can allow you to reduce or postpone payments and possibly extend your repayment period. Forbearance usually lasts three to six months, and you may be able to renew it over a several year period. Note that even if you've postponed payments, interest will continue to accrue.
5. You can also switch your repayment choice. See Step 2 to better understand the differences between repayment options.
6. Note that extending payments or deferring your loan does extend the life of the loan, meaning you may pay more in total over time. This tradeoff could be worth it if you simply can't meet the monthly payments now but expect to have a higher income in a reasonable period of time.
7. Whatever happens, you must avoid going into default (over 270 days late on a payment). If you go into default, the government is able to withhold tax refunds and earnings and even bring you to court.

Step 6: Stay Current

• Continuing to research the student loan industry will keep you abreast of changing rates and new information that will help you reduce your overall debt.

1. Students at schools such as New York University and the University of Pennsylvania have received payments from their schools as a result of their recommendations of Citibank as a preferred lender (Citibank was giving the schools a percentage of their profits in turn). More schools are said to be doing the same, as inquiries are pending.
2. It could be worth checking in with your school's financial aid department to see if you qualify for any retroactive benefits or payouts such as that from the Citibank case.
3. Use non-profit Student Loan Borrowers Assistance's list of resources to find information about different lenders or to contact legal or financial advisers who can help you with your student loan concerns.
4. The New York Times also has a "Times Topic" about student loans that functions like a database of all the current student loan news. Check it regularly to keep up to date on student loan information.
5. FinAid, a site recommended for its financial aid advice, notes that the subprime mortgage crisis is likely to have an impact on student loans, too. Their opinion is:
   • • "Federal loans will remain available, although loan discounts will likely be reduced significantly. A higher minimum balance may be required to consolidate. Private student loans will likely have stricter eligibility restrictions, requiring a higher credit score or a cosigner. There may be increases in the interest rates and fees on private student loans. Lenders will encourage borrowers to make payments of interest while they are in school."

Resources for How to Reduce Student Loan Debt

• Federal Student Aid: National Student Loan Data System
• FinAid: Student Loans
• Simple Tuition: Financial Aid and Student Loan Resource Center
• The New York Times: Times Topics: Student Loans
• FinAid: Repayment Plans
• Federal Student Aid: Loan Consolidation Information Center
• Student Borrower Assistance: A Resource for Borrowers, their Families and Advocates
• FinAid: Student Loan Consolidation
• FinAid: Student Loan Checklist
• Project on Student Debt: Comparing Discounts on Federal Student Loans
• FinAid: Loan Forgiveness
• FinAid: Loan Calculators
• Simple Tuition: Compare Student Loans
• Simple Tuition: Defaulting on Student Loans
• Chicago Tribune: U.S. Lending Helping Hand on Student Loans (January 27, 2008)
• Federal Direct Consolidation Loans: Online Calculator
• Project on Student Debt: Q&A About Income Based Repayment
• FinAid: Prepayment Calculator

Articles about the Student Loan Crisis

• The New York Times: Private Loans Deepen a Crisis in Student Debt (June 10, 2007)
• The Huffington Post: Subprime Mortgage and Student Loan Parallels (January 25, 2008)
• Chronicle of Higher Education: Report: Student-Loan Debt Rises Faster Than New Graduates' Starting Salaries (September 25, 2007)
• The New York Times: Try Shopping Around for Student Loans (May 2, 2007)
• The New York Times: A Math Lesson on Student Loans (June 13, 2007)
• HigherEdWatch.org: Subprime Mess Reaches Higher Ed (January 31, 2008)
• HigherEdWatch.org: Duped into High Cost, Private Loan Debt? (January 22, 2008)
• U.S. News and World Report: Getting Out of Student Loan Debt (September 27, 2007)

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