Student loan debt is one of the hottest topics over the last few years. Large media outlets have been having a heyday profiling individuals with massive amounts of student loans and poor future prospects brought about partially from a slow economy and partially from a poor choice in career-to-debt ratio. I can relate to these stories in a way as I certainly had my fair share of student loan debt after graduating college in 2005: $36,000. However, I worked hard to pay off these loans within five years. Because of my own experience and choices, sometimes I think that student loan debt is given a bad rap. After all, if I could pay off my debt in five years through the choices and sacrifices that I made, then why can’t others?
Federal Student Loans versus Private Student Loans
Something that can make a big difference in being able to pay down debt sooner rather than later is the type of debt. Not all student loan debt is created equal, and I learned this firsthand as I held both federal subsidized loans as well as private student loans. It turns out that these types of loans are treated differently in the areas of consolidation, repayment options, debt forgiveness options, and potentially even when interest begins to accrue.
When Interest Rates Begin to Accrue
Of my $36,000 in student loan debt, approximately $21,800 of it was federal subsidized loans. This really gave me an edge in not accruing lots of interest debt on top of principal debt, as federally subsidized loans do not begin to accrue interest until a six month grace period after your graduation. In contrast to this, federally unsubsidized loans and private student loans begin to accrue interest the day the loan is disbursed. This means that your pile of loans has potentially been accruing interest when you were sitting in Biology 101 all the way to grabbing that diploma in Biology (and beyond!).
Repayment Options and Flexibility
Both federal loans and private loans may offer repayment options and flexibility, but the key word for private loans is “may”. With federal student loans, you are guaranteed more flexibility in repayment, but with private loans, you need to check with your lender. An example of flexible repayment options on federal loans is the new Pay As You Earn (PAYE) program. This program is available as an alternative to the standard repayment plans of federal loans from the Direct Loan Program. It accelerates debt forgiveness by five years, as well as lowers the maximum monthly payments from 15% to 10% of discretionary income.
Deferment and Forbearance Options
Both federal loans and private loans offer options to stop or reduce monthly payments without going into default for a period of time in the case of hardship. Federal student loans also offer repayment options for when you face a tough financial situation. These include forbearance and deferment. A deferment is a period of time you are granted where payment towards interest and principal is not necessary. Forbearance can be either mandatory or discretionary, and can buy you up to 12 months of no payments or reduced monthly payments (though interest will still accrue).
Each private lender offers their own plans, so be sure to check with your private lender.
Loan Forgiveness Options
Private lenders typically only forgive a loan in very severe cases. For example, Wells Fargo will only forgive the co-signer of a private loan in the event that the student has died or become permanently disabled.
The federal government offers many options for loan forgiveness. If you go into public service, then you may be eligible for loan forgiveness after a set number of years. For example, if you are teacher and have been teaching for five consecutive years in a low-income elementary or middle school, then you may be eligible for up to $17,500 of loan forgiveness through the Teacher Loan Forgiveness Program. Other programs include Public Service Loan Forgiveness (PSLF), and the new Pay As You Earn (PAYE) program.
You should always look into scholarships and grants first when figuring out whether or not you can afford a college education. This is because these types of financial aid do not have to be paid back. Once you have exhausted those possibilities, check your eligibility for federal student loans before going to private student loans. No matter what, be sure to fill out the Free Application for Federal Aid (FAFSA).