Wednesday, March 13

5 steps to deal with student loans

5 steps to deal with student loans
| By Benjamin Feldman,

Debt repayment may not have been top of mind when you signed up, and the monthly payments can look scarily large.

When you are 18 years old and on the verge of starting your college experience, you often have no way of understanding the impact that student loan debt will have on your life (once you graduate from college).

In the eyes of the 18-year-old, the numbers are abstract and don't convey what it's like to actually make payments on the loans each and every month.

I was lucky that my student loans were manageable, but even so it was a bit of a shock to realize how hard it is to pay them off. Here are some of my tips from personal experience:

No. 1: Wrap your mind around the numbers, no matter how big.

There's no way around it -- you have to understand exactly what your student loan debt means on a monthly basis. And to do that, you need to compare your student loan payments to your monthly budget. Depending on how big of a percentage of your budget is represented by your student loan minimum payment, you will know what kind of plan is realistic for you.

If your payment is less than 10% of your total monthly budget, then you don't have to worry about your ability to pay. And if your required student loan payment is somewhere between 10% and 20% of your budget, then most likely you can make your payments (and perhaps even add a little extra).

But if your minimum payment is above 20%, and especially if it's more than 30%, then it is going to be a challenge for you to make that payment every month. If that's the case, you will need to take advantage of the advice in the next paragraph.

No. 2: If you can't afford your payments, don't give up -- take action!

It's very important that you don't simply give up if you think you can't afford your monthly payment. Why? Because if you give up, you'll risk becoming delinquent and perhaps eventually defaulting on your loan. Just like with credit cards, making one late payment can have serious consequences, including doing harm to your credit scores and opening you up to being pursued by debt collectors or having your wages garnished (for federal loans).

Fortunately, you can avoid all that! There is an income-based repayment program that allows you to get on a new repayment schedule where your monthly payments are capped at 15% of your monthly income. It does mean that your repayment timeline is extended to 25 years, so you'll have to pay more interest in the long run, but that is a small price to pay if it gives you some breathing room if payments that are too high.

While the IBR program is only for federal loans, many private lenders have similar programs that will allow you to set up an extended repayment schedule. Just call your lender and ask.

No. 3: Know your options and your rights.

But what if you can't make your payments at all? In that case, it's still important to be proactive and make use of forbearance and/or deferment.

Forbearance means that your lender agrees to give you a certain period of time -- perhaps three months -- when you don't have to make any payments on your student loan. This is often granted as a courtesy, especially if you don't have any income and are not able to make a payment. But you have to ask for it and work out the arrangement with your lender. Simply ceasing to make payments without communicating with your lender will usually cause your loan to go into default.

Deferment can also be a great option and is usually available to those who are are in graduate school, unemployed or on active duty in the military. Deferment means that you don't have to make payments and it usually means that your loan or loans are not accumulating interest.

There are other options you should know about, including the Public Service Loan Forgiveness Program, which will forgive all remaining student loan balances after 10 years for anyone who has worked in a qualifying public service job and consistently made payments during those 10 years.

No. 4: Make a plan and stick with it.

So once you've got a monthly payment and a plan that works with your budget, how do you make sure you stick with it? There are a few tips that may come in handy. For one thing, tell your loved ones about your plan and ask them to encourage you along the way -- the power of emotional support from those you trust and care about may surprise you and will help you accomplish your goal.

I would also recommend that you use online tools to help you track your budget and manage your debt. These tools ensure that you stay on top of your plan and help you continue to be motivated by reminding you of your progress each month.

If you need extra money in any given month in order to stick with your goal, you can try freelancing -- using sites like Elance, oDesk or Mechanical Turk -- and make some side money with a small investment of your time. Whether you like writing, designing, crafting or something else, you can probably find someone who is willing to pay for your skills and your time. And that extra money can go toward paying your student loan payments. Who knows, it may even help you pay off your loans early!

No. 5: Stay positive.

This may be the most important of all. By maintaining a positive outlook and brushing off any negative incidents along the way, you will increase the likelihood that you pay off those loans and become debt free. There will always be some hurdles that interrupt your progress and make your path seem much more difficult, so don't be hard on yourself when these things happen. Just accept that they are a part of the journey and "keep on truckin'." Your positive attitude will ensure you continue to do the things necessary to reach your goal. And that will make all the difference.

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