The average Millennial leaves college and enters the professional world with an average $27,000 of student loan debt. If you finished school in 2016, the average student loans debt was a whopping $37,172! Over 70% of students left school owing money. I call this the curse of the millennial student loan syndrome.
In this post, we break down the various types of student loans, repayment plans, and consolidation/refinance options available.
Many loans have high interest rates that are dangerous and very scary if you are not on top of them. Some repayment plans last over 15 years and over the course of the loan, you may end up paying more than the total amount of the loan itself.
I considered the details of the payments and realized I was barely making a dent into the principle. I would end up paying over $63,000 in interest if paid back over 15 years! Chances are, if you are trying to live in an expensive city, you are struggling to make a dent.
Check out how I paid off my $80,000 student loan debt in 3 years!
Millennials were extremely optimistic as we entered adulthood despite the fact that we are expected to be less financially successful than our parents. Many Millennials went to college only to find ourselves employed in unrelated fields or underemployed and job hopping frequently. We want to enjoy travel, have adventures in expensive cities, but also the thrills of financial freedom in a world of intense competition. How is this possible with student loans? How can we rid the curse of the millennial student loan syndrome?
The Various Types of Student Loans
Loan Providers:
Loans may come from a different borrower each semester/year. It is possible to have >10 student loan payments due every month upon graduation. Confusing! Consolidation can simplify the repayment process (section 3)
Student Loan Types:
Two major sources of student loans exist: 1) Federal; and2) Private. The majority of loan availability and repayment programs are through federal sources.
Federal Loans:
The main federal loans that are given directly to the student are Stafford and Perkins loans. If you have student loans, you likely have one, the other, or both. They usually have low interest rates and softer repayment options including a grace period post graduation.
Stafford loans
Stafford loans are more common than Perkins. They come in two forms, subsidized and unsubsidized. Subsidized loans do not accrue interest until after you graduate (meaning the federal government pays the interest while your win school). Alternatively, unsubsidized Stafford loan interest accrues while you are in school. You are responsible for paying it back in full once you graduate. Stafford loans typically have a 3.7% interest rate. Very low in comparison to your credit card bill! But it adds up.
Perkins Loans
2017 legislation ended the Perkins loan program. They were popular with need-based college students. These loans were desirable because they were all subsidized (government paid interest while in school). Note that not all colleges or universities participated/offered Perkins loans as an option. The interest rate was fixed for the life of the loan at 5%.
PLUS and Grad PLUS
These loans are available to both students and parents to help pay education. They are also part of the federal loan family. These have no maximum amounts and can be used to cover any education costs not covered by other financial aid. PLUS and Grad Plus loans typically have a 6.3% fixed interest rate.
Private Education Loans
This family of loans may be available to students and parents who still cannot pay for the full education, even with federal loans. Interest rates could be fixed or variable throughout the life of the loan. The interest rates are typically much higher than federal loan options, lower than credit card rates. 6-10%. The are not subsidized so student will accrue interest while in school. Some will require payments while in school as well. Yikes!
Repayment Plans
There are multiple repayment plans available to graduates, but the most common are: 1) Standard Repayment; 2) Graduated; 3) Income Based; and 4) Pay-as-you earn.
You are automatically assigned a standard repayment plan if you do not select among others. You pay a fixed monthly fee over the course of the loan. This option pays the least amount of interest. Often times, the monthly rate is high but they are paid off in 10 years.
Graduated repayment plans also typically have a 10 year repayment term. The payments start small, and then increase every two years. This is a good plan for those who expect their income to increase over time.
Income based repayment requires you to show partial financial hardship. Repayment is based on income, location, and family size. This plan can last up to 25 years, but you may qualify for forgiveness of the outstanding balance after 20-25 years. That said, you may have to pay income tax on the forgiveness amount.
Pay as you earn is similar to the income based plan, however, you may still be eligible for this plan even after you are no longer in financial hardship. Same forgiveness opportunities exist as the income based. Note that you will end up paying more interest the longer it takes you to pay back these loans. Yikes!
Note that there are three paths to loan forgiveness.
Note that for Perkins and Private Loans repayment plan options may differ. Look at your promissory note for details.
Loan Consolidation and Refinance
When I finished school, I came out with $80,000 in student loan debt. I had multiple loan types, and even more loan providers.
Loans may come from a different borrower each semester/year. It is possible to have more than 10 student loan payments due every month upon graduation. Confusing! Consolidation can simplify the repayment process.
If you consolidate your student loans (federal or private), you will be responsible for one payment, once a month, to one lender. Note that the Debt Consolidation Loan program will only consolidate your federal loans. You can use other private consolidation providers to consolidate both federal and private into one.
But what if my loans have different interest rates? Rates for the Debt Consolidation Loan program are determined by the weighted average of the interest rounded up to the nearest one-eighth of 1%.
Student Loan Refinance: Some student loan borrowers with excellent credit may be able to qualify to refinance their existing federal student loans with a new loan with a lower interest rate. Private companies such as SoFi offer competitive rates with the potential of costing less in the long term. You may have to pay more upfront, but the interest may be less. Check out SoFi. I cosigned for my Fiancee’s refinance loan and we save $25,000 over the life of loan.
Last but not least, check out my FREE Student Loan Elimination Guide