One of the basic rules of society is to be true to your social obligations, including debts that you incur in the course of your life.
Incurring debts appears to be one of the growing realities of life. Next to death and taxes, debt can be as close to your kind of reality as you finish your secondary education and advance into college.
In the United States today, most young men and women who wish to enter college must be willing to incur debts through student loans. It’s not a fad or a passing fancy that will fade in the course of time. Debt is a type of reality that becomes more and more real with each passing semester, with each passing year level, until you come face to face with it after your graduation revelry.
If you’re like most young American graduates, you’re likely to be already in debt in the amount of $25,000, long before you receive your first employment pay check. And if you count among the 9% of recent graduates, chances are you won’t be able to start working yet. And if you’re in a rush to find employment, you could end up, initially of course, doing inventory work or sweeping aisles for Wal-Mart or Target.
Whether your future employment objective is to find immediate employment anywhere at any salary, or wait for the best offer, and hence you’d be unemployed for a while, you will have to start planning how to pay off your student debt. As mentioned earlier, it’s coming to you whether you like it or not, sooner or later, like “death and taxes” as graphically described by this often-repeated quote.
Earlier and Better
The earlier you realize that you cannot dodge paying off your loan by simply moving to another address and other similar cheap ploys, the better it is for you in the long run. Moving to a new address simply prolongs your agony. When your student loan lender starts running after you, your credit history is affected as well, no matter what your address. Beware then, because you may eventually realize that your college degree may not be as useful if your credit history is downright poor.
If you must take on menial jobs to pay off your loan, it’s still your choice. The American public won’t judge you on that account. But your credit rating company certainly would. If you care about your future, which you certainly do, you wouldn’t want them to downgrade your credit rating. After all, your credit offers a wealth of conveniences in terms of your purchasing power. If you’re young with a big future ahead, you wouldn’t want to compromise your credit.
Plan your Payments
Around 25% of new graduates fail to pay their first loan repayment on schedule. This is not good for you and, of course, for your lender. This will technically disqualify you if you apply for loan deferment and other forms of debt relief in the future.
You resolve to pay for your student loans when they fall due should start when you’re just applying for them. As recommended by many student loan consultants, you should apply for federally funded loan before considering private student loans. Even if private student loans offer the same standard rates as federal loans, government-funded loans should still be your first choice because of the benefits it offers in terms of their more relaxed payment terms.
If you’re still unsettled months after you graduate, federal loans provide more options for you in terms of loan reliefs, including loan forgiveness. Unless your career plan includes working as a volunteer for the Peace Corps or enlisting in the military or teaching full-time elementary and secondary students, then you should not even consider loan forgiveness as one of your options. However, if you feel cut out for these careers, then you should know that these career paths offer federal loan forgiveness options.
Don’t Default
However, you must also know that these options will no longer be open to you if you’re already in default of your loan.
Being in default means your failure to make the necessary payments based on the terms of the contract and promissory note that you signed at the time that you took out the loan.
Below are Some Consequences if you Default on your loan:
- Credit bureaus are notified of your default, thus adversely affecting your credit rating.
- Ineligibility to apply for additional federal student loans.
- Garnishment, which means forced deduction from your paycheck
- Income tax refunds can be withheld and used to pay off your loan.
- Late payment charges and collection charges.
- Possible lawsuit against you.
Beg, Steal, or Borrow
We certainly don’t recommend stealing, but if you can beg and borrow from friends and relatives to keep your student loan active, then by all means do it. If you’re genuinely finding it difficult to give your regular monthly payment, then you should consider applying for the various debt-relief options available to you.
You should plan in advance how to approach your student loans even before you receive your lenders first demand letter. If you honestly think that you’re not prepared yet to start your payments, then your first move is to apply for loan deferment to give you more time to prepare.
You can cite many reasons for this, but the most common are unemployment and extreme economic hardship. Both are easy to prove in terms of documentation. You just have to submit before the U.S, Department of Education Financial your latest ITR, utility bills, medical bills and other documents to prove your extreme economic hardship claim. Student loan arbiters need very little convincing because of the current economic crunch.
If you can prove that what you earn is not sufficient to meet your basic household, then you may still qualify for the income-based repayment, which allows you to pay based on your present income, not on the amount stipulated in the original loan contract.
Aside from the government’s loan forgiveness program that is reserved for certain career paths, government assisted student loan relief efforts revolve around term extension, deferment, interest reduction, payment reduction, etc. In the end; you will just have to pay off your loans, with or without these debt-relief options.
What To Do?
As noted above, defaulting on your loan is a serious offense not just against your lender but to society. It’s a breach not just of contract, but also of confidence of a society that thrives on honor and integrity.
Repay your student loans automatically
If there is a good reason to believe that you won’t be able to settle your student loans according to the terms of your contract, then you should not wait for the demand letter to get to you before you decide to meet with you lenders. Months before your first due date, you must take the initiative to arrange a meeting with your bank or school to explain your situation. The lender can then inform you of the options available to you.
Pay off the loans with the highest interest rates first
If you have several layers of loans, you can start with those with the highest interest rates because they are bound to become costlier over time. You can, likewise, opt for loan consolidation, which simply means combining all your loans in one loan. This process can actually cut your monthly payments in half.
Once you’ve considered all your options and decided how long the deferment period will be, your monthly payments, etc., then it’s time to plan your strategies to sustain your monthly payments for the next few years. If you’ve taken pains to carefully weigh your paying power against your projected income in the next few years, then paying off your loans shouldn’t be that painful.
It’s a good idea to open a bank account and allow your bank to automatically transfer a certain amount every month to your lender to ensure that you don’t forget your monthly payments. Most banks give certain discounts for prompt payments, and they could amount to a few thousand dollars over the life of your payment period.
Keep abreast of student loan developments
Even if you’re paying your loan regularly, make sure to monitor developments pertaining to student loans. The government is working on many proposals geared towards student loan relief, and you may still qualify for some of them. The government has recently approved a debt relief measure that shortens debt payment terms from 25 years to 20 years without requiring you to add anything to your monthly payments.
If you’re college graduate, your chances of success are certainly greater than most non-college degree holders. At one point of another, you can already afford to pay off your student loan in one sweep.
If you’re in that position, don’t hesitate to make that move for the following reasons:
- Paying off your student loan at the soonest possible time lowers your debt to an income ratio. This type of financial ratio makes a good impression about you. This translates to your readiness to get approval for a housing or car loan.
- If you’re keeping your student loan active for tax break purposes, forget about it. If you’re already making $65,000 a year, the tax break is no longer material in terms of savings.
- As long as you’re paying your loan monthly, you’re losing money you can otherwise invest in mutual funds with high interest.
Student loans are practically inescapable. You cannot get rid of it by filing bankruptcy. Bizarre as it may sound, the only way escape it is through permanent disability or death, but no one will want to take these options. By paying it off sooner, you can feel a strong sense of relief. You can also consider yourself more prepared and ready to face life’s never ending financial challenges.
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