How to Properly Manage Student Loan Debt

Student loan debt is one debt you cannot get away from. It is non-dischargeable and if not managed properly will wreak havoc on your credit score. Taking on student loans is all too easy, whether applying for federal government loans or private loans. It is important to not borrow more than necessary or more than you can anticipate repaying from future income. Private student loans are most usually granted with the endorsement of a willing guarantor. They could well end up liable for the debt if the loan payments are not made in a timely fashion.

The best way to manage student loan debt is to ensure that interest payments which are due whilst still a student are honored. Most lenders give the option of deferring the interest until after graduation but it will accrue on Stafford unsubsidized loans and private loans during college. However Perkins and Stafford subsized loans do not require interest paying until six months after graduation. If you can afford to pay any interest rather than defer it, then the total repayments will be less without the compounded interest added to the balance.

If after graduation there are many student loans to repay, it makes sense to consolidate them into one monthly payment. Federal loans cannot be consolidated with private loans, but all federal student loans can be combined into one consolidation loan. There is no need to extend the term of the loan when consolidating and it only pays to consolidate if the overall interest rate will be less than the median of the current rates.

As federal student loans have low fixed rates, it is important to concentrate on paying down private loans first as these are more expensive, whilst at the same time meeting the monthly payments on federal loans. Discounts are generally offered if monthly payments are met by automated payments, thus it pays to sign up.

It is important to understand the consequences of late payments and default on student loans. Late payments will incur late payment charges and lower credit scores. Private student loans are recorded as in default if the payments are not met for 120 days, whilst default is registered at 170 days on federal loans.

Whilst private lenders need to go through normal collections channels to recover any outstanding debt, they do have the option of pursuing a co-signer who is equally liable for the debt. By failing to make proper provision to deal with private student loan debt the student is jeopardizing the credit status of the guarantor.

Private lenders may well resort to applying for court judgments to recover their funds. Private student loan debt can grow massively if not dealt with in a proper manner and there are many instances of graduates looking at loans which they will still be indebted to for years to come, with interest and fees far exceeding the amount of the original loan.

The federal government does not need to obtain a judgment to recover unpaid loans: it has the power to intercept tax rebates from the IRS, garnish wages or make deductions from any social security payments. If a federal loan does reach the default stage it is not irreversible.

There is a chance of entering into the Department of Educations debt rehabilitation program to bring the debt up to date and then have the default notice expunged from ones credit record. However, whilst a loan remains in default, the debtor will be prohibited from any future federal borrowing.

Obviously with the consequences of default it is best to avoid this scenario by handling student loan debt properly in the first place. If you know that there will be difficulty making the agreed repayments, it is imperative to contact the lender at once and try to arrange either a deferment or forbearance on the loan. These offer temporary relief from payments, though some private lenders will add a fee for arranging this. Both deferments and forbearance will add to the overall cost of the debt by extending the term.

When students graduate it makes financial sense to overpay student loans wherever possible and thus reduce the total interest charges. Clearing down student loan debt early makes it easier to cope with future borrowing on mortgages and other obligations. The worst thing to do is ignore student debt, as it is almost guaranteed to catch up with you at some point.

Source: us dept of