Category Archives: Student Loans

Should You Invest or Pay Off Student Loans?

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Should You Invest or Pay Off Student Loans

As a recent college graduate, you may be considering whether to invest the money you have saved or use it to pay off your student loans. This can be a difficult decision as both options have their advantages and disadvantages. On the one hand, investing your money has the potential to earn you a higher return on investment (ROI) in the long run, but there are risks involved. On the other hand, paying off your student loans can bring financial relief and reduce your debt-to-income ratio, but it may also limit your financial flexibility. In this blog post, we will discuss the factors you should consider when deciding between investing or paying off student loans.

Investing vs Paying off Student Loans

When it comes to deciding between investing and paying off student loans, it really depends on the individual’s circumstances. Generally, investing is a good option when the expected return is higher than the interest rate on loan. However, if the interest rate is high (over 10%), it’s wise to prioritize paying off the loan first. It’s important to calculate the average return on investment and compare it to the student loan interest rate. One must also consider the power of compounding interest and the benefits of starting to invest early. Nonetheless, it’s crucial to find a balance between investing and making student loan repayments. Ultimately, one should make the right choice for their financial future.

Calculating Average Return on Investment

Calculating the average return on investment is an essential consideration when deciding whether to prioritize paying off student loans or investing. As mentioned, the average return for the S&P 500 is 7% after inflation. This means that over ten years, a $10,000 investment would yield a total return of $19,672. However, it’s essential to remember that return rates aren’t guaranteed and can fluctuate based on the market. It’s crucial to take into account your risk tolerance when making investment decisions. Ultimately, calculating the average return on investment can help you make informed choices about your financial future.

Comparing Investment Returns to Student Loan Interest Rates

When it comes to deciding whether to invest or pay off student loans, it’s important to compare the potential returns on each option. One way to do this is by comparing the expected average return on your investments to the interest rate on your student loans. Typically, the average return on investments will be higher than most low-interest student loans, making it a more attractive option. However, if the interest rate on your student loans is particularly high (above 10%), prioritizing repayment may be the better choice. It’s important to find the right balance between investing and meeting your financial obligations, so you can build a strong financial future.

Focusing on Saving and Investing for the Future

Focusing on saving and investing for the future can be a wise financial decision for those with student loan debt. By building a savings cushion, individuals can have peace of mind and protect themselves from unexpected expenses that could derail their loan repayment plans. Investing in a diverse portfolio, such as a 401(k) or individual retirement account (IRA), can also help grow their money and potentially outpace the interest rates on their student loans. It’s important to remember, however, that investing comes with risks, and it’s essential to make informed decisions and work with a financial advisor. Overall, balancing paying off debt and investing for the future is key to achieving financial freedom and security.

Viewing Paying Off Student Loans as an Investment

Viewing paying off student loans as an investment may seem counterintuitive, but it can actually be a smart strategy to build future wealth. By putting extra cash towards student loan repayment, borrowers are essentially earning a return equal to their loan’s interest rate. This guarantees a return on investment, whereas investing in the stock market comes with risk. Plus, eliminating student loan debt can improve credit scores and increase financial stability, which can lead to future wealth-building opportunities. It’s important to balance paying off student loans and investing for the future, but viewing student loan repayment as an investment can be a solid starting point in creating a financially prosperous future.

The Power of Investing Early

The Power of Investing Early is a key factor in building long-term wealth. By investing as early as possible, individuals can take advantage of compound interest, where their initial investment grows over time, leading to more significant returns. By investing a small amount of money regularly over a long period, the investor can accumulate significant wealth over time. This is especially relevant when compared to paying off student loans early. While paying off loans helps reduce debt, it doesn’t offer the same level of opportunity for long-term wealth building. Therefore, it’s essential to consider investing early on and finding a balance between investing and student loan repayment. This way, individuals can benefit from both worlds and achieve financial stability and success in the long run.

Risks of Investing vs Paying Off Student Loans

While investing can potentially yield significant returns, it comes with inherent risks that need to be considered. The value of investments can fluctuate, and there’s a risk that you could lose some or all of your money. Paying off student loans, on the other hand, guarantees a fixed rate of return without any risk. However, it’s important to keep in mind that the interest you’re paying on your student loans is likely to exceed the returns on your savings account or other low-risk investments. It’s a balancing act between the risks of investing and the guaranteed return of paying off student loans. Your risk tolerance, financial goals, and overall budget should all be taken into account when deciding between investing and paying off student loans.

Finding a Balance Between Investing and Student Loan Repayment

When it comes to deciding between investing and paying off student loans, finding a balance is key. It’s important to take a step back and evaluate your financial goals, income, and debt. If your student loan interest rates are high, it may make sense to prioritize paying off your loans first. However, investing may be a better option if your interest rates are lower. It’s also important to consider the long-term benefits of investing early and how it can impact your financial future. Ultimately, finding the right balance between investing and student loan repayment will depend on your individual circumstances and priorities. It may be helpful to consult with a financial advisor to determine your best course of action.

Conclusion: Making the Right Choice for Your Financial Future

In conclusion, deciding whether to invest or pay off student loans is a personal financial decision that requires careful consideration of individual circumstances. While investing can yield a higher return than student loan interest rates, it’s important to remember that student loan repayment is a long-term commitment that must be met. Balancing investment goals with student loan repayment can help graduates move towards financial stability and security. Ultimately, the right choice depends on each person’s financial situation, investment goals, and risk tolerance. By taking the time to understand their debt and assessing their investment options, graduates can make informed decisions that set them on the right path toward achieving their financial goals.

How Are Private Student Loan Interest Rates Determined?

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Student Loan Interest Rates

Only a few students go through the entire school year without collecting a loan of some sort. But that is not the hard part. The challenging part is paying back the loan. However, some students prefer to know how the interest rate will be determined so that calculations and projections can be made. If this sounds like you, then you are in the right place. This article will explain what interest rates are, how they are determined for student loans, and how they affect your loan at the end of the day.

What Are Interest Rates?

Interest is a percentage (fixed or not) of a certain amount, positive or negative – as in the case of debts. When you borrow an amount, or you are loaned money, an interest usually follows and the rate increases with every day that the debt is owed until the loan is paid back in full. For example, if the interest rate of a loan of $1000 is 0.2%, that means that a sum of $2 will be added daily to the total amount you’ll pay back (for example). So that at the end of every month, you have an additional $60 to pay when you pay off your loan.

In reality, the interest rate isn’t that thick but at the same time, you must know that some federal student loans place a fixed rate and it affects the total cost of your monthly payment or loan. However, not all interest rates are fixed. Some are varied – well it is called variable interest rates. Let’s take a look at that for a minute.

Fixed vs Variable Interest Rates

Fixed rates are certain fixed amounts you should pay at the end of the day regardless of how much you loaned or how long it took you to pay back. While this might sound great for those that like to stall on payment – there might be some disadvantages. There are different methods for determining fixed interest rates and it depends on the type of loan, the lender, and maybe the state you are in. However, this type of interest rate still seems to b a better option for those that are running a long-term loan plan.

The variable interest rate is flexible and fluctuating. It can also be tagged ad fluid because it changes with regard to the market index. Therefore your monthly payment might change (increase or decrease) during the time of repayment depending on what the market index says. Over time, the interest rate might become overwhelming or not but it’s not too safe for long-term loaners.

When the federal government grants student loans, the interest rate is usually fixed but when it comes to private lenders, it depends. Some prefer fixed rates while others go for variable interest rates. The type of interest rate you pick is dependent on a lot of things but mostly the term of the loan.

How Are The Rates Determined: Private and Federal Student Loan Interest Rates

Federal student loans are gotten by applying using the Free Application for Federal Student Aid (FAFSA). The fixed interest rate is usually based on a 10 year Treasury note rate and it is determined during May. The amount of the interest consists of a percentage attached to the loan type and the status of your education (undergraduate or graduate).

For Private loans, the deal is much different. First, the application varies from company to company and they can be funded by online lenders, credit unions, banks, and so on. The type of interest rate (fixed or variable) is also subject to the company that’s lending out the money. However, they usually work with credit history before giving out loans so that they can ensure that they’ll get their money back. They also look at your income frequency and status and employment history. Some companies check your credit and do a critical evaluation before awarding a loan. All of these they do only to be sure that you will pay back their money – and on time too.

Conclusion

Many things affect a student loan, the lender, the type of interest rate, market factors, rate choice, creditworthiness, and so on. However, the ways to determine the rates sit with what kind of loan it is – a federal student loan or a private one. Federal student loan interest rates are determined more easily and are straightforward while the other needs more documents, checks, and proof that you will pay back on time.

All in all, if you can pay off your student loans early, take the chance and do it!

Benefits of Paying Off Student Loans Early

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Benefits of Paying Off Student Loans Early

There are different reasons students collect loans and that’s not a bad idea. The challenge only arises when it is time to pay back. There is a major conflict between whether to pay back now (all at once), little by little, or to pay the entire thing later. However, the choice is not that straightforward. For example, some financial advisors will opine that students should hold back on payment if they don’t have enough saved up or if there are other debts involved. However, this article will show you some important benefits you’ll gather if you close your eyes and pay off your student loan early.

Why You Should Pay Off Student Loan Early

  1. The earlier you pay, the cheaper it is:

Yes, it might look like that $$$ is a little thick at the moment but the sad truth is that it increases over time. For those that might seem confused, this is how it works. A student loan – almost all loan types come with a percentage increase referred to as interest. This interest accrues with a balance (positive or negative). When you owe, it increases with a negative balance and vices versa for when you don’t owe. So the earlier you pay, the easier it would be to pay off the interest too.

  1. It will quickly be out of the list of things to do:

This is a little more straightforward. When you pay off a debt, you’ll have lesser things to worry about. You will also be able to place your money on other more profitable investments like college (or if you are already in college), a university of your choice, a master’s, or even something out of the academic line like a vacation.

  1. Your debt-to-income ratio will improve positively:

A debt-to-income ratio can also be seen as a credit score or ‘improving/worsening your credit’. When you have a good credit score, it means that you have a good history of paying off your debts quickly. This means that lenders (or whatever institution loan money) trust you and would be happy to give you better interest rates next time you need to loan. Having a bad credit score (or increased debt-to-income ratio) means that you usually allow the interest to accumulate too long before paying and so lenders find it hard to trust you with honoring your loan agreement. In the long term, a good credit score will serve you.

  1. You would save more money:

Similar to the first point, when you get rid of student loans on time, you end up saving more money. This is a common mistake students make – they wait till the end of the repayment term before they start making repayments. By this time, not only would you have accumulated too many interest charges, but you’ll also lose a lot of money. But by paying off early (or increasing how much to pay off monthly), you can save hundreds or even thousands in interest charges that you can (again) use for other things.

  1. Financial stress will be eradicated or lessened:

What is financial stress? It’s when the source of your anxiety is lack or insufficiency of money/finances. Waiting till the last moment to pay off your student loan will put financial stress on you no matter how financially stable you are/were before then. It is usually a debt that starts small and ‘payable’ until the interests pile up over time to become this huge debt that’s a pain in the neck. Paying it off while it’s still young will save you financial stress in the future.

Conclusion

Though at first, it might be difficult to pay off loans due to the thoughts that ‘the money isn’t enough or that there are other investments. But one of the worst mistakes to make with debt is thinking that the debt can wait. Yes, it will wait but at the same time, interest charges are accruing waiting for when it will shower you with big-time financial stress. Save yourself the hassle and pay it off while it’s still cheap. You can start slowly as soon as possible and before you know it, it’s all paid off. Good luck!

Should you use a Challenger bank over your bank?

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digital Challenger bank

Challenger banks are what they say on the tin: a challenge to traditional banks. They pose as a challenge, or a threat because they’re up and coming with a different approach to banking.

By nature of being rebellious, they’re young businesses. They threaten the status quo of banking because they offer a new take on banking procedures, infrastructure and services. Generally, you’ll find much cheaper currency exchange fees, more tech-heavy usability and much faster sign up processes. 

Start-ups in this field have a very good understanding of what ticks us off about traditional banks, and they’ve engineered a way to overcome such bureaucracy, high priced and ancient UI.

With incredibly easy sign-ups, super speedy transactions and innovative technology, it’s not difficult to see why they’re on the rise. There’s no doubt that traditional banks are becoming extremely weary of this trend, and it may be the threat they need to evolve a stuck-in-the-past, complacent service.

How popular are challenger banks?

To no surprise, there are a growing number of challenger banks. Of course, they’ve not replaced traditional banks in either quantity or userbase (yet?), but they’re on the rise nonetheless.

What’s interesting though, is that this has been the story in Europe. In America? Not so much.

They’re popular in most of the world in fact, particularly in Europe in places with a strong fintech scene. London is perhaps the birthplace of the most prominent challenger banks, with Monzo, Starling and Tandem being situated there. With a 5 minute in-app sign-up process, these are becoming extremely popular and seem to be slowly replacing traditional banks.

It’s strange then that the US hasn’t really welcomed them with open arms, and haven’t been producing many themselves. It’s thought that US companies are focused on payment solutions instead of bank accounts, as they have more scope for profits and fewer regulations. This surely applies to most countries, though.

The real answer lies in the distrust of startups. In Germany and the UK, customers don’t think twice about trusting fintech’s with their money, in conjunction with having faith in government-backed deposit protection regulations. Americans it seems don’t have the same trust. 

It seems that although payment startups are trusted, a little more time (or value offered?) is needed for mobile banks.

Despite this, one of the largest challenger banks, N26, has launched into the US (with 100,000 wait-listed US customers ready to pounce), along with Monzo set to enter the US too. There already some domestic US challenger banks to choose from, although they’re certainly not in their stages of maturity yet.

The advantages of challenger banks

The thing that challenger banks have over traditional banks is their lack of infrastructure. This sounds like a disadvantage, but it means they can react faster to changes. Traditional banks have huge sunk costs, with many different departments to attend to, making them always a bit behind. When tech is at the foundation of a business instead of brick and mortar capital, you can be fluid in the market.

The innovation of technology has perhaps been its strongest point so far. The services they provide are highly customizable. You can find yourself creating saving spaces – virtual spaces that are safe from spending. These can be saving pots for different areas of your life, allowing you to budget better.

And it’s secure because you can freeze your card with a simple click in the app, as well as limit certain spending like gambling or ATM withdrawals. There are fewer fees, more transparency, and an overall feeling of clean efficiency because they don’t have their hand in a million different departments.

The largest benefit for small companies and those who like to travel is the cheap fees of challenger banks. For Americans (and Europeans), N26 is one of the strongest options. If we take them as an example, then for no monthly account fee, you can benefit from free card payments in any currency. This is profoundly advantageous, and completely embarrasses traditional banks which charge flat fees on top of huge 4% currency spreads on any foreign purchase.

And with many challenger banks, you can also withdraw from a foreign ATM for no extra cost, and receive a second-to-none exchange rate. This on its own is what sets them apart, and is the reason why expats are in love right now. Many companies (such as Transferwise in the UK) even go as far to call their debit cards as “borderless cards”, because that’s exactly what they are – complete and utter frictionless foreign spending and money transfers.

Disadvantages

For many users, it can be difficult to author some drawbacks of using them. Of course, though, the reality is that nothing is perfect.

Firstly, they’re smaller companies. This smaller, more malleable infrastructure is their greatest asset, but it also means they’re less reputable. They feel less safe. They’re of course fully regulated, but their smallness means they might not inspire credibility.

They’re somewhat limited too. Many people like dealing with one entity and building a relationship with them. Traditional banks may have debit cards, credit cards, mortgages, various savings and student account and so on. Challenger banks are very much for one job and whilst they do it well it may not be suitable for those who want to go in-store, build a relationship and rely on them for all financial aspects of their life.

Personal preference is one thing, but what’s important here is that it’s important for the US to be more accepting of challenger banks. Choice is at the core of free America, and what better way to increase that than to threaten traditional banks with innovative technology?

Why Student Loans Are Poison

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student loans

Student debt has almost become a pejorative term at this point, and is denounced by many as being not worth the degree. Whether or not the debt is worth it is to be discussed, and ultimately to some extent a matter of personal preference, but there is no getting away from the fact that student debts are mounting and becoming increasingly difficult to justify. Debts to the level where it can have poisonous effects on the rest of people’s lives, and all from a decision we make at such a young age.

Americans in 2018 graduated with an average debt of $29,000, with some of those having parents who took out debts of around $35,000 in federal parent plus loans. This is a significant amount, which doesn’t include the costs of food, studying resources and housing. Graduates are expected to have double lifetime earnings on average than high school graduates, though it can vary widely depending on the major. However, when opportunity cost is factored in – the time during college that could have been spent working and gaining experience – then suddenly gaining $80,000 in debt for higher future earnings may not always be the right choice.

Regardless of which option has a greater monetary outcome on aggregate, there is also a cost to our creativity. When 60% of student debt recipients are expected to finish paying off their loans in their 40s, then steady employment, particularly once already gained, is the sensible option. Ultimately, one is less likely to start up a company when you have student debt. The burden of debt tends to be a driving force towards traditional careers, which can be either good or bad depending on the person. Entrepreneurship though is something that we should place a greater value on. Not only is it an expression of hard work, creativity and ambition, but small businesses are the basis of most developed economies and heavily drives demand. Taking risks is a great way to grow as an individual as well as being great for social mobility, but the appetite to take such risks is stifled by debts.

In this sense, taking on student debt is the antithesis of the American dream, and is to concede to a life (for the most part) of employment. While this may be fine for some, it’s strange that this is incentive for the brightest youngsters in an economy – a perverse paradigm. It also goes against the new movement of financial independence, which promotes living debt free in order to save up enough wealth to retire, and be free from.

If the loan repayments weren’t already enough of a burden for your future self, then just dealing with lenders can be off putting enough. Student loan recipients complained to a federal watchdog over 12,000 times in 2017. Such problems were surrounding things such as attempts to consolidate federal loans and accessing promised rewards from companies, such as lower interest rates.

With student debt in America reaching $1.25 trillion in 2018, the accumulation of debt is drawing parallels to the 2008 mortgage crisis. Much of the premium on the student loans is actually the risk of the student not graduating, too. It is entirely possible scenario to mount up $10,000 in student loans, fail to graduate, cannot turn to bankruptcy yet only have the wage opportunities of a high school graduate.

It is objectively a risk-seeking attitude that taking on large amounts of debt without substantial capital and highly probable future earnings in place. Conventionally, the narratives around this behaviour is to determine it as highly risk-seeking, but it is strange that this isn’t the case when it is framed as student loan debt. The power of it being a culturally normal thing to do can blind us from an objective and rational decision about it.  The probabilities of not acquiring a high paying job should be more realistically analysed, and coupled with the opportunity costs. It also seems the possible direct and opportunity costs of college loans are drastically underestimated, and are suitable for a fewer number of individuals than commonly believed.

Would you Pay for a FAFSA Prep Service

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tax prep

A few weeks ago I posted a review of Dave Ramsey’s College Planning Service. You all had mixed reviews of the product, and many people have come down hard on Dave for the product.

So, because I am not Dave, and because I do not have a cushion of millions to fall back on if a product/idea goes bust, I wanted to float an idea by you all before pursuing it any further.

Considering a FAFSA Prep Service

A coworker of mine was talking to me recently about how the lines at our local community college’s financial aid office are out the door each semester. Their office is woefully understaffed and the people who truly need help filling out a FAFSA, or answering their financial aid questions, are swamped.

Do you think these same people would pay to have help completing their FAFSA? Rather than wait in a long line in a financial aid office, would they rather go sit in a cushy chair across from a personalized advisor, and pay to have help filling out the FAFSA?

Consider this, FAFSA.com, the non-government entity run by Student Financial Aid Services, Inc. completes tens of thousands of FAFSA applications each year and they charge $79 for each application. People still pay this fee even though the FAFSA can be completed for free at www.fafsa.ed.gov.

Why do people pay this? To be fair, I know that many folks stumble across FAFSA.com and think it is the official government site, even though it clearly states it is not. SO a portion of these customers are there because of a lack of knowledge.

The rest however, have made it very clear that they are willing to pay for this professional service, and to have personalized assistance in completing their FAFSA.

In talking with a number of these folks, they view it as no different than paying someone else to complete their taxes each year. They know they could do it themselves for free, but they are too busy/confused/lazy to do it themselves.

Does it Defeat the Entire Purpose of Financial Aid?

Does a service of this kind defeat the entire purpose of financial aid? Most often, the people submitting a FAFSA application are the ones who need to qualify for need-based aid. They don’t have $79 lying around to throw away on professional FAFSA assistance.

Would it be highway robbery to provide this service at a cost to college students and their parents?

These are the questions that I am wrestling with. There are many other physical limitations to a service of this kind, but before I move any further in the planning phase of this business, I need to iron out the ethical dilemmas.

I am looking forward to hearing your thoughts!

Student Loan Interest Rates Doubled! Are You Ready?

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student loan deferments

By now you have likely heard that last Friday, Congress failed to pass an extension which would keep student loan interest rates low. Because of this failure, yesterday, Stafford Subsidized student loans doubled in interest rate from 3.4% to 6.8%!

Yes, these are the loans that are made available to students who come from low to middle income families and also qualify for the Federal Pell Grant. Yes, these are need based loans that just received a doubling of their interest rates.

Both isles of Congress seem fairly set on passing legislation that will reduce these interest rates back to their former levels, but for now, the infighting has prevented any actual measures being passed. Until Congress takes action and changes this interest rate back, any new Stafford loan disbursements made after July 1, 2013 will be under the new interest rate increase. The good news is that if Congress does pass this measure, it would be retroactive in time for the upcoming Fall 2013 semester. So please let your Congressman know how much you would like the interest rates to stay at 3.4%.

What Should You Do?

Unfortunately, if you are in a situation where you need to take out student loans, there is really nothing that you can do. Stafford subsidized and unsubsidized loans are the most competitive interest rate student loans available, and their repayment options are by far the most flexible of any loan type you will find. If you need a student loan, this is still your best choice for a loan.

You can however, try to guard yourself from having to take out student loans at all. You should always max out any “free” financial aid before you consider student loans as an option. Many financial aid award packages automatically bundle student loans in with your financial aid award, but you do not have to be so quick to borrow.

You can maximize your scholarships searching by checking out the free listings at your local library, your high school guidance counselor, your department at college, or your professors. These resources are often excellent resources for scholarships, that not many other folks think to explore.

You could also consider becoming an entrepreneur and starting your own business to pay your way through college. You could buy and sell used textbooks, you could start a furniture moving company moving stuff into and out of dorm rooms, you could start a computer repair service on campus, you could start a mobile coffee cart business, or you could freelance write online for some extra cash.

All of these methods will earn you money which you can then use to pay your tuition outright. In my mind, there is not much more satisfying than working hard and paying cash for something you are passionate about. Paying your own way through college also makes you appreciate what you are paying for and will likely help you be more invested in your education. You will also pick up some very valuable business skills, and develop an entrepreneurial mindset that will benefit you throughout your entire life.

The Case for Adjustable Student Loan Rates

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student loans

Maybe that title is a little misleading…

I struggled with what to title this post because I could not figure out what would get my point across the best. What I am suggesting is a way to mediate the student loan debt crisis going forward by offering different student loan interest rates for different students.

On Federal Stafford Loan disbursed through June 30, 2013, the interest rate for subsidized loans is 3.4% and on unsubsidized loans is 6.8%. Unfortunately, if an extension bill is not passed, these low rates are set to expire at the end of this month. Both of the rates are set to effectively double.

Millions of students receive Stafford Loans every year, and every single one of them pays the exact same interest rate regardless of their situation. No other loan that I know of charges a set interest rate to every borrower. It is very un-capitalistic.

A Discriminating Student Loan Interest Rate

When you apply for a home mortgage you understand that the bank will take into account your personal situation before they come back with a loan offer. They will look at your credit score, your income, your payment history, the term of the loan, the home you intend to buy, your down payment, and the loan to value on your home. All of these factors play a role in determining how risky of a borrower you are, and therefore the interest rate and amount of money they will lend to you.

Student loans should operate on the same principle.

Student loan interest rates should take into account the student’s major, proposed course of study, career and education plans, grades, student loan repayment history (if applicable) and the outlook on job’s in that major.

The easiest way to do this would be to set a standard rate, and then give rate deductions for having qualifying criteria in each of these categories.

For example, let’s set the Subsidized Stafford Loan rate at 5% and the Unsubsidized Stafford at 8%. If you maintain at least a 3.0 GPA then you automatically receive a .25% reduction. If your major is in a critical need area, then you can receive another .25% reduction. The private job market on the lookout for employees with your skills, get a .50% reduction. Majoring in a critical research area, another .25% reduction.

This information could all be captured when submitting the FAFSA, and the interest rate would be returned through the FAFSA application. This would not increase the work on a school’s financial aid office, and would be a relatively simple process for student borrowers.

It would also give student borrowers an incentive to keep good grades, to major in a critical needs area, or to pursue a career field that was actually in demand, guaranteeing a job, and therefore the ability to repay those student loans.

Private Loans Could Also Join The Party

Private loan lenders would be even easier to incorporate into this flexible student loan interest rate model. Their loans are already based on credit and income so they have underwriting criteria in place already. They could also work on the interest rate reduction model, giving incentives when certain criteria are met.

This would likely increase the amount of quality student loan borrowers in their ranks, and increase their chances of receiving all of their money back.

The Bottom Line

There is not a quick fix for the student loan debt crisis. However, so many students receive loans to fund an education that does not benefit them. Students in courses of study that are not employable, and student who receive loans with a failing GPA are simply milking the system. They will graduate with student loan debt and no hopes of repaying those loans.

This system could at least show the importance of being selective in the major you choose, and highlight the importance of a course of study which will teach you the skills needed to get a job!

What Happens if I Don’t Make My Student Loan Payment?

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First, I think it is very important to dispel a common myth about student loans: They are required to be repaid, and they can ruin your financially if they are ignored!

If you don’t make your student loan payment or make your payment late, your loan may eventually go into default. If you default on your student loan, that status will be reported to credit bureaus, and your credit rating and future borrowing ability will be damaged. In addition, legal action can be taken to require payment through garnishment of wages and withholding of tax refunds.

Unfortunately, I meet too many students who admit they did not realize the money they were receiving for college was from student loans, and that they would someday have to repay these student loans. This is a heartbreaking realization, but also one that is easily avoidable.

Don’t ignore the fine print on your college financial aid award letter!

With that said, let’s suppose that you do understand your need to repay your student loans but you run into financial difficulties and are struggling to repay your monthly loan payment.

What Happens if I Don’t Make My Student Loan Payment?

The Good News

Student loans have the most flexible and generous repayment terms of any other loan on the market.

The Bad News

Student loans cannot be discharged in bankruptcy so you will need to eventually figure out a way to repay them.

Where to Start?

First, you will need to determine what type of student loans you are repaying. There are a number of student loans, and each of them will likely have a different repayment servicer.

Here is a handy chart from the Department of Education:

Which Organizations Handle Which Loans

Type of Loan

Whom to Pay
Direct Loans and FFEL loans owned by ED You will make your payments to your loan servicer. Your loan servicer will provide you with information about your repayment terms and your repayment start date.
FFEL loans not owned by ED You will make your payments to your lender, the organization that made the loan initially. The lender could be a bank, credit union, or other lending institution. Your lender will provide you with information about your repayment terms and your repayment start date.
Federal Perkins Loans Your loan servicer will most likely be the school you were attending when you received the loan, but in some cases, the school will have a separate organization handle the billing and other services for your Perkins Loan. Contact the school about making Perkins Loan payments.

As indicated in the chart above there are three main types of student loans: Federal, Private, and Campus Based. Each of these loans will have different methods for handling payment arrangements so it is imperative that you know which loans you have.

Second, you will need to evaluate your own financial situation to determine if your financial troubles will only cause you to be late for one month, or if you anticipate this to be an extended financial situation. If you just lost your job for example, you would treat this differently than if you spent too much on clothes this month.

If you expect your financial troubles to extend beyond one month, then you should consider applying for a financial hardship forbearance. You will need to contact your lender or repayment servicer and fill out their form to begin this application process. The key is to begin this process as soon as possible. Waiting until the day your payment is due to begin this process will not help you!

Third, you should consider a loan consolidation if you have multiple student loans to repay each month. Many student complain about forgetting to pay a student loan each month. If you have multiple student loans that are repaid to different lenders, this can be confusing. One way to alleviate some of this confusion is to consolidate your loans into one monthly payment. This allows you to have one payment to focus on each month and can generally allow you to pay your loans off faster.

You should be careful however, as consolidating your student loans also may cause you to lose deferment and forbearance options in the future.

The Bottom Line

It is important to understand that student loans do have to be repaid and they can hurt your credit if they are not repaid.

You have many options available to you and all of these can be accessed with a simple phone call or a visit to your lender’s website.

The worst thing you can do is shrink into a hole and hope that your financial trouble goes away. There are people willing to help, but they cannot help you unless you reach out t them!

The Pay As Your Earn Calculator for Student Loans

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pay as you earn

Towards the end of 2012, President Obama introduced a new student loan repayment program called: Pay as You Earn. It was activated on December 21, 2012, for all eligible borrowers.

Here is the information on the repayment plan according to the Department of Education:

[box type=”info”] To qualify for Pay As You Earn, you must have a partial financial hardship. You have a partial financial hardship if the monthly amount you would be required to pay on your eligible federal student loans under a 10-year Standard Repayment Plan is higher than the monthly amount you would be required to repay under Pay As You Earn.

For this purpose, your eligible student loans include all of your William D. Ford Federal Direct Loan (Direct Loan) Program loans that are eligible for Pay As You Earn, as well as certain types of Federal Family Education Loan (FFEL) Program loans. Although your FFEL Program loans cannot be repaid under Pay As You Earn, the following types of FFEL Program loans are counted in determining whether you have a partial financial hardship: Subsidized and Unsubsidized Federal Stafford Loans Federal PLUS Loans made to graduate or professional students Federal Consolidation Loans that did not repay any PLUS loans for parents

You also must be a new borrower as of Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011. You are a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan as of Oct. 1, 2007, or had no outstanding balance on a Direct Loan or FFEL Program loan when you received a new loan on or after Oct. 1, 2007. Your payment amount may increase or decrease each year based on your income and family size. Once you’ve initially qualified for Pay As You Earn, you may continue to make payments under the plan even if you no longer have a partial financial hardship. [/box]

Under this plan your monthly payments will be capped at 10% of your discretionary income. What is discretionary income? As defined by ED: “Your income minus the poverty guidelines for your family size.”

Here is an example if you are a family of 4 and your income is $50,000 annually. You would take $50,000, subtract the poverty level for your family size, which is $23,550, and your remaining “discretionary income” is $26,450. $26,450 divided by 12 months is $2,204. So under the “Pay As You Earn” scenario your monthly loan payments would be capped at 10% of this discretionary income or $220 per month.

Another advantage of this plan is that if you make 20 years of consecutive on time monthly payments under this program, the remaining amount of your student loans will be forgiven.

20 years is a long time…

The Bottom Line

This new repayment program only scratches the surface of the real problem with student loans: high college costs and students having zero financial sense.

It does however, give some respite for families who are struggling under the burden of student loan repayment. It may not help you pay off your student loans any faster, but it may help ease your monthly budget. Especially if you have a large family size, as your discretionary income fluctuates based on the poverty guidelines for family size.

If you are wavering on whether to switch to this new repayment plan or not, you can use the handy calculator at the Department of Education’s website, and it will tell you if this new repayment plan will save you any money or not.

Do you think this is worth a try? Or this just another government bailout is disguise?

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