The good news is, when you become debt savvy, you discover that debt can be managed effectively and, sometimes, to your advantage. Here’s how.
Relentlessly research forgiveness options
It can be very tricky to get your student loans forgiven; however, if you work in the public service industry, there are options for you. The Public Service Student Loan Forgiveness Program allows borrowers working in public or nonprofit industries to have their loans forgiven after making 120 qualifying payments. The key here is to understand what payments and what types of employment qualify. It’s also extremely important, with any forgiveness program, that you keep religious documentation. Document your payments like it’s your job. Seriously, keep copies of your copies of your copies.
Other ways to have your student loans forgiven or have your loans paid for include the Perkins Loan Cancellation and Discharge option, which allows you to have a percentage of your loans forgiven if you volunteered or worked with certain organizations such as the Peace Corps and AmeriCorps, or worked with organizations such as Head Start or the armed services.
Gain incentives through automatic payments
Some lenders offer an interest rate reduction (usually between 0.25% and 0.50%) if you sign up to make automatic payments. Furthermore, you may also qualify for a lowered interest rate if you make a specific consecutive number of payments on time.
Though 0.25% may not sound like a lot right now, it can save you thousands over time.
Know your payment options
In recent years, the Obama administration passed legislation to help the average student loan borrower. There are now several Income-Driven Repayment Options depending on the type of loans that you have, including Pay as You Earn and Income-Based Repayment. The terms of these repayment plans vary, but essentially they allow you to make payments based on your income and are typically much lower than those of the Standard 10-year repayment plan.
As always, there are pros and cons. Remember that, while you may have more disposable income to work with now because you are paying less on your student loans, these income-based payments will stretch out the life of your loan due to interest accruing over time.
However, this may allow you to put the money saved toward paying down other debt such as your mortgage or car payment. These options may also allow you to have more money left over at the end of the month to invest in a retirement plan or general savings.
Economic hardship and forbearance options
There are pros and cons to opting for an economic hardship or forbearance on your loans. The main benefit is that these options suspend or dramatically reduce your payments for a period of time, allowing you to get back on your feet and get your finances in order. The drawback? Interest is still accruing, thus increasing your overall debt burden.
That being said, use these options wisely and only when absolutely necessary. Something to keep in mind: Many lenders are generous and allow you to take a forbearance for three, six, or even 12 months. This may seem like a great option; however, one of the reasons lenders are so generous with forbearances is because they are still earning money due to your interest accrual. As such, it behooves you to only take a forbearance for as long as is absolutely necessary to get you back on your feet. Then starting paying again.
Understand compound interest
When you were a fresh-faced college student and decided to sign your very first promissory note, you probably had no concept of what compound interest is or how it can affect you in the long term. If you’re still a little confused about how this dreaded form of interest works, it’s essentially “interest upon interest.” Insidious though it may seem, your lender has every right to charge interest on the accrued interest amount of your loan, and, unfortunately, this can make it very difficult to whittle away at the principal amount.
Understanding compound interest and looking at how it might affect your loan balances over time is the first step to understanding how much money you want or need to be putting toward your loans to pay them off in a desired timeframe.
Debt can be scary and stressful, but if you’re willing to invest the time to understand your options, it can also be manageable.
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