Paying back student loans is not much different than paying back other forms of debt, although there are some subtle differences that are worth noting, such as the multitude of repayment benefits that typically come with most education loans.
These repayment benefits range from deferment, and forbearance, all the way to the variety of payment adjustment options that may be available to you.
By taking some of these repayment options into consideration you can hopefully payback your student loan debt with relative ease, although you must first have a general understanding of how paying back a student loan works exactly.
You’d be surprised at some of the comments I hear from students in regard to their lack of knowledge about general loan principles. Some students don’t even have a firm grasp on what interest is, or how loan amortization works. This is why it is critical to at least review the general concepts behind paying back a student loan.
The Fundamentals of Paying Back A Student Loan
A student loan is not really that much different than a mortgage, or a car loan when it is time to begin the repayment process. The actual amount of money you borrowed via the student loan is called the principal, and your interest rate will be calculated as a percentage of your entire loan amount.
You will then have to make a monthly payment for x amount of months to payback both your principal, and interest. Most student loans abide by a standard amortization schedule that will force you into paying more interest at first than principal, and this ratio will shift as time moves on and you continue making payments.
- While it should be possible to payback your student loan in-full if you have the required capital, it is customary to make monthly payments on a continuous basis, or perhaps pay off a chunk of the loan via a single payment.
Contact your lender to find out what their policy is about such practices, as each student loan lender will handle these types of situations differently. If you decide to keep on making monthly payments, you will have to do so for your entire loan term, which should run anywhere from ten, to sometimes over thirty years.
Your student loan may be sold to an outside third-party at some point, or be serviced by a student loan servicer. You of course still need to payback your loan when this occurs, and you will typically be notified via mail about any changes to your loan. Student loans are often serviced by outside third-parties, so don’t be alarmed even if your federal student loan is being serviced by a company that you never heard of.
Again, this is completely normal, and in actuality you should welcome the opportunity to work with a loan servicing company, as these organizations can make paying back your student loans a much more efficient process.
Utilizing Repayment Benefits
If for some reason you are unable to make your monthly student loan payment you may want to take into consideration the repayment benefits that may have come with your student loan. These repayment benefits can lessen the burden of paying back student loans by postponing when you have to make a payment, or by reducing your monthly payment.
Deferment and forbearance are the two options that can postpone when you must make a payment, with forbearance capitalizing the interest that may accrue during your postponement time.
If you cannot make your full monthly payment you may want to avoid forbearance and deferment, and instead simply choose to utilize various payment adjustment options. These include but are not limited to:
- Interest-only payments
- Graduated and extended payment schedules
- Income-adjusted payments
The availability of these will depend heavily on the type of student loan you have, and your lender. These won’t typically go into effect automatically, so you should contact your lender directly once you know that you may want to utilize one of these options.
If you have a number of different student loans, and are tired of making a number of different payments each month, you may want to look into student loan consolidation. This works by getting an entirely new loan to payoff your current student loans, thus leaving you with single monthly payment to make instead of having to make multiple payments.
Most consolidation loans are only made for certain types of student loan debt, so you will most likely have to get a separate consolidation loan for your federal student loans, and your private student loan debt. If you only have federal student loan debt, I recommend looking into the Federal Direct Consolidation Loan, as this is a government loan that is provided as part of the Federal Direct Loan Program.
Delinquency, Default, and Bankruptcy
If for whatever reason you cannot make your student loan payment, your student loan account may become delinquent. Student loan delinquency simply describes what happens when you don’t make your payment and your account does not stay current.
- When this happens you still have the opportunity to make your back payments in order to make the account current, although most lenders will tack-on late-fees and perhaps other penalties that will cost you some money.
If you allow your student loan account to become delinquent for a long enough time period it will eventually fall into default. Student loan default is much worse than delinquency in that it will be more difficult to make your account current once again, and once you fall into default there is a good chance that your entire student loan will be due in its entirety.
- While this isn’t a common practice, it can happen, and once a default occurs your account will fall into collections, and may actually be sold to another company, or a collection agency.
There are severe implications for defaulting on a student loan that will of course depend on whether you have a federal, or private student loan. These include:
- Adverse credit effects
- Harassing collection efforts
- The accumulation of fees, interest, and penalties
- Potential to be sued
The bottom-line is that you don’t want to default on your student loans, and you should do everything in your power to keep your student loan accounts current.
If your student loan is about to fall into default, or you are currently in default, you have probably thought about what filing bankruptcy can do to your student loan debt. The reality is that student loans are very difficult to discharge via a bankruptcy proceeding regardless of what state you live in.
Recent amendments to the bankruptcy code have made it so that you must prove “undue hardship” in order to have your student loans discharged. This is very hard to do, and I wouldn’t put too much stock in resorting to bankruptcy to have your loans eliminated.
Final Statements
You can make paying back your student loans a relatively efficient process if you have a firm grasp of the terms of your loan, and the repayment options that you are afforded.
Knowing these things will allow you to proceed correctly especially when you may want to lower your monthly payment, or delay your payment. Most student loan lenders are quite flexible, and if you have any issues you should not hesitate to contact your lender for whatever reason, as you may be surprised about what they can do for you if you begin the conversation.
While having a knowledge of how to payback your student loans is essential for anyone who wants to make this process as simple, and efficient as possible, the real key that will allow you to make all of your payments on time should be utilized before you take out your student loan.
The key I’m talking about involves using the appropriate discretion when applying for student loans, and not taking out loans that you know you may have a difficult time paying back. Even with the current economy and tighter credit market, it is still relatively easy to get approved for a lot of student loan debt, so use your best judgment when taking out such loans and you will be okay in the long-run.
