A person decides to go back to school to earn a Master's degree. S/he applies and gets accepted in a top university and pursues her/his degree. After achieving high marks and a degree from a prestigious institution, it is time to repay all those educational loans. The student asks her/his accountant and others who have gone through this financial aid process, what is the best way to pay back loans? The overwhelming answer is: consolidation.
So the graduate calls her/his lending provider and finds out that this is no longer an option in 2009 into 2010! And now s/he will be forced into an unreasonable schedule of repaying debt at a whooping $700 a month or more. Does this sound familiar?
It might, especially for those students who took out Stafford loans in the 2007-2008 or 2008-2009 school years and beyond. It is exactly what is happening in lending institutions all over the country, and to borrowers from all walks of life, whether they are young post graduates, single professionals in their thirties or those supporting a family in their forties.
This financial crisis has become a major source of stress for many. So how can a person pay the bills and the loans in an environment crippled by a rising unemployment rate of 10 percent?
Why a Student Can't Get Debt Relief Consolidation
If students call Sallie Mae, the most popular student loan company in the United States, they will receive an answer they won't want to hear. Consolidation is a thing of the past. This was not the case in earlier years, before the economy began to plummet in 2008, when students could consolidate loans at a low interest rate. In fact, during this time Sallie Mae made courtesy calls to its customers and gave the option of consolidation right over the phone. Many students received excellent deals, such as an interest rate of 5 percent on Stafford loans if they combined all their debt. It was a win-win situation.
Right now, those who took out Stafford loans (both subsidized and unsubsidized) in 2007 and beyond face a fixed interest rate of 6.8 percent. It is not terrible, but at the same time, there is no option in the near future to lower it greatly. Another problem is that many loans have been sold to the Department of Education, thus debt is divided in two places, whereas before, it was just one.
How to Lower Interest Rates and Create a Better Payment Schedule
Here are some tips to make the current Sallie Mae system work in a borrower's favor:
- Enroll in the Automatic Debit program. Every month, Sallie Mae will deduct the payment automatically from a bank account, instead of mailing in a check each month. To sign up is easy. Just register online at Sallie Mae's website and provide information. Once the registrant is approved, her/his interest rate will be lowered by 0.25 of a percentage point. Enroll way ahead of time because it takes a while to be approved and up to 3 months to process the deduction.
- If a borrower, for example, is paying back $250 a month (on a 10 year payment plan) for loans taken out during the 2007-2008 school year, that number may be reasonable. Yet, for debt from 2008 to 2009, that payment alone could accumulate to over $500 a month! Thus, increasing the total monthly payment to $750 or more. Borrowers should ask themselves, why is this a dramatically different number? The latter payment is a 4 year plan. Therefore, call Sallie Mae and asked to be switched to a 10 year plan (or more) to relieve financial worries. But remember when doing so, your interest amount will increase.
- Write off interest when doing taxes. Many people forget to do this. A simple way to remember is when registering online with Sallie Mae, check the box that requests a 1098-E form, which shows the total annual interest, to be displayed on the borrower's profile.
- Defer not default. If a borrower simply cannot afford any payments at the time, choose the defer option. Defaulting on even one loan payment can result in horrible consequences, such as dramatically lowering credit score. In the future, that could ruin a person's chances for buying a home, car, or any large purchases.
- Look forward to the future. Sallie Mae has said that consolidation will return, but they do not know exactly when. Check back in the new year for more financial options.
The good news is that student debt* is good debt. This is opposed to credit card debt which equals bad debt. Therefore, if borrowers understand why consolidation is not possible at this time and work within the system by applying the tips above, then financial freedom can be found.
*To lower student debt or eliminate it all together, these two articles, Tuition-Free Colleges and State v. Private College, Best Financial Aid, discuss how to fund a student's education for free or at minimal cost.
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