Consumers take out student loans to pay the cost of college tuition, supplies, and books throughout their degree program. Unfortunately, when it comes to paying the loans back, most lenders schedule the loans for a 10-year repayment plan. The plans aren’t affordable for all students and often lead to financial hardships and loan defaults. After college, each student has a grace period according to the terms of their student loans, and they have the option to choose from a variety of alternatives to get a more affordable plan for repaying their loans. College graduates who feel that student loans are ruining their lives read about the 4 ways to deal with the loans once and for all.
1. Income-Based Repayment Loans
Income-based repayment loans are based on the borrower’s current earnings. The federal government calculates a fair and reasonable payment amount that is affordable for the borrower and won’t present them with any financial hardships. It is designed to help the former students pay as they earn without defaulting on the loans. The program is designed to help students who don’t get top-paying jobs right after graduation and need assistance covering the cost of the loans and avoiding a loan default.
The borrower must qualify for the loans according to the most recent guidelines. Currently, private loans aren’t eligible for the income-based plans, and if the borrower has defaulted on their loan at any time throughout the loan contract, they aren’t eligible for the income-based repayment programs. He or she should also review the terms of any loans that are transferred from private loans to federal loans. Some lenders won’t allow income-based repayment options if the loans were originally provided by a private lender.
The lender re-evaluates the borrower’s income each year and determines if their payment must be increased due to a higher income level or reduced if their income is less than it was originally. The payment rate is based on 15% of the former student’s income if the loan was taken out after July 1, 2014, and ten percent of the borrower’s income if the loans were received before the date.
The benefits of the program include smaller payments, lower interest rates, and potential forgiveness. Any student who is signed up for the program could receive total forgiveness for any outstanding loan balance after 20 to 25 years from the starting date for the loans. However, the borrower must stay in the program for the full duration of their loan contract to get forgiveness for their student loans.
The disadvantages of the program are that the payments aren’t always the same every year especially if the borrower’s income goes up. Some borrowers see a slow-moving loan balance if they pay too little, and it doesn’t cover the current interest rate applied to the loan. The program isn’t available to any borrowers who have private loans only, and private loan borrowers will need to find a different plan and meet those eligibility requirements.
2. Debt Consolidation Loans
Debt consolidation loans are provided through private lenders or financial institutions that specialize in consolidation services. The programs allow the borrower to place all their student loans into one larger loan and pay off their current lender completely. The loan products are classified as a private loan, and the borrower faces all restrictions associated with private loans. However, it is possible for the borrower to get a lower interest rate if they have decent credit ratings.
The minimum credit score for debt consolidation loans is 630. However, the preferred credit score is around 700 for a consolidation loan. The applicant must provide proof of their income to establish affordability with their preferred lender. Their income-to-debt ratio is evaluated by the lender to determine if the borrower can afford the loan with their current income and monthly obligations. However, some lenders that cater to consumers with bad credit might forgo the credit check, and the borrower is advised to review all the terms of the loan carefully to avoid any predatory lending practices.
Borrowers who choose debt consolidation loans could also use the loans to manage and pay off additional debts, such as credit card accounts and consumer loans. Some lenders allow former students to refinance their loans after a couple of years to reduce their payments or achieve a better interest rate. Borrowers can restart the loans at a later time if they are facing financial hardships due to job loss or a sudden decrease in their income. Information about starting a debt consolidation loan is now available from debtconsolidationusa.com.
3. Deferments and Forbearance
Deferments and forbearance allow borrowers to complete the necessary forms to stop payments for a predetermined amount of time. The forms are available through their private lender or through federal student loan providers including the US Department of Education and Navient. Borrowers can print out the forms directly from their lender’s website, too.
First, the borrower determines when they are able to restart their payments after the forbearance or deferment. The standard allowance for a deferment or forbearance is up to one year. Consumers add the preferred dates on their forms and submit them through the US Postal Service. Some lenders require the applicants to send a copy of their most recent tax return to show their current income or paystubs for the last three months. All borrowers must provide a specific reason for the deferment or forbearance request.
Deferments are also provided if the student is attending college. If they stop classes at any time after their loan going into repayment, the loans go into repayment mode after the grace period has run out. However, if the student informs their lender they are going back to school, the lenders can apply a deferment and stop payments until the student is no longer attending school or graduates. Each time you restart a college program and attend at least part-time you are eligible for a deferment of your loans. Most lenders restrict deferments for a maximum of three years, in most cases, if the former student doesn’t plan to attend college again in the future.
The most common deferments are in-school, military, cancer treatment, and unemployment deferments. Military personnel who are deployed can defer payments on their loans for the full duration of their deployment. Cancer treatment deferments are provided for any patients who are undergoing chemotherapy, surgical removal of tumors, or who have been classified as terminal. Unemployment deferments are also available, but the borrower must complete forms showing that they are attempting to become employed.
The benefits of choosing a deferment or forbearance include stopping all payment immediately, some loans don’t incur interest during deferment, and the lender cannot take legal action against the borrower in an attempt to collect loan payments, such as wage garnishment or seizure of the taxpayer’s income tax refund. Forbearances, unlike a deferment, are available for up to eight years, and the applicant can apply for the forbearance at the end of the current forbearance if they are eligible for the program.
4. Financial or Economic Hardship
Applying for a financial or economic hardship is beneficial for anyone who has student loans that have started the repayment cycle. Income restrictions apply to the hardship program, and your income cannot exceed the highest amount listed in the program details. Students apply for a financial or economic hardship when they lose their job, experience a reduction in wages, or cannot currently afford their payments.
When applying for the economic hardship, you must obtain an application from your lender or the federal student loan program that gave you student loans. A copy of your income tax return is necessary to establish eligibility for the program. The applicant’s current income must indicate that their income is lower than 150% of the national poverty level. The household family size determines how far above or below the poverty level the borrower is. The borrower doesn’t have to be employed, but if they are, it is necessary to provide comprehensive evidence of their current income and household size to establish eligibility for the economic hardship program.
Anyone who receives government assistance through Supplemental Security Income, food stamps, or TANF are eligible for a financial hardship. Any volunteers who work with the Peace Corps can apply for a financial or economic hardship to stop payments on their student loans during their service. If the borrower’s income is still below the poverty level for their household size, they can reapply the following year. Some federal loan programs impose restrictions on the total number of economic hardships the applicant can obtain during their loan contract.
College graduates must start their repayment plan for their student loans after their grace period expires. If they cannot afford the payments, the former students review several options for making repaying the loans more affordable. Among their options are debt consolidation loans, income-based repayment plans, deferments, forbearance, and economic hardship relief. The benefits and eligibility requirements for each plan determines if it is the best choice for a borrower.