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Everything You Need to Know About Paying Off Student Loans

Everything You Need to Know About Paying Off Student Loans

A great career, a higher salary, fulfilling, life-changing relationships, a greater understanding of the world—the upsides to a higher education are clear. But then there’s the other side: student loan debt. It’s a national issue that’s amassing and one that’s affected Heather Jarvis, an attorney specializing in student loans education. “By the time I graduated from Duke Law School, I owed $125,000 and was facing $1,200 monthly payments,” she says. “I had to spread my payments out over thirty years. It wasn’t until after I graduated that I fully understood exactly what borrowing for an expensive education would mean for my financial security—and my family’s security—going forward.”

Jarvis has dedicated her career to helping people navigate the American student loan quagmire, and she advocates to accelerate public service loan forgiveness. “It can often be confusing to understand exactly how the loans work–and how the debt can compound over time,” she says. We asked Jarvis to guide us through repaying student debt, the difference between federal and private loan providers, and things to consider before—and after—getting a higher degree.

A Q&A with Heather Jarvis

Q
What’s the current student debt situation in this country and what’s behind it?
A

More than 40 million Americans have student loans, and there’s outstanding student debt of about $1.4 trillion—so around one in four households has some student debt.
The cost of education has risen quickly and has outpaced increases in earnings for families. College education is more important than it’s ever been. There are fewer good jobs that don’t require a college degree and more that do. So we need to have an educated workforce, but unfortunately, we don’t have enough affordable options for education—and I think families have a hard time making decisions that are totally rational or market-based when it comes to colleges.

Also, we’ve seen a decreased investment in higher education, particularly at the state level. At the same time, need-based financial aid has shifted to more merit-based financial aid, so the money that is available is not necessarily going to those with the greatest need.

It can be hard to understand the cost of borrowing to begin with; it’s not something we’re wired to intuit. It’s a complicated math-based question that has to do with big life decisions, such as where to go to school or what to do with our careers. It’s not until much later in the process that you get the information about exactly what the cost of that is. Student loans are very easy to borrow. I’m not saying they should be any less so, because that would result in another problem if we restricted the availability of loans, but for right now, student loans are kind of a necessary evil: They’re easy to borrow and much less easy to successfully repay.


Q
Typically, how does student loan interest work?
A

When you borrow money, you pay for that privilege in interest. A simple example would be if you owe $100,000 at a 6 percent interest rate. An initial response may be: Well that’s not so bad to pay $6,000 for having borrowed $100,000—but it’s $6,000 a year until you no longer owe that balance. This $6,000 breaks down to $500 a month, and that does not reduce the $100,000 principal. You could pay $500 a month consistently and never get anywhere in terms of paying off the initial $100,000 you borrowed. As interest continues to accrue, it can be hard to keep up. As consumers, it’s essential to understand how much interest is accruing on our debt from day to day, month to month, year to year. Similar to putting money in an interest-bearing account, debt will also continue to grow if you do nothing.


Q
How do federal and private student loans differ?
A

Essentially, federal student loans are more affordable and less risky than private student loans, in most cases. Federal student loans have unique consumer protections such as death and disability discharge provisions, flexible repayment plans, and forgiveness provisions. And for many borrowers, federal loans offer lower interest rates than private loans. People should always borrow federal student loans before considering private loans.

The reason that we have both kinds is because federal student loans are limited as to how much you can borrow, particularly at the undergraduate level. For example, a freshman in an undergraduate school can get $5,500 in federal student loans, which is not enough to pay for many schools, as well as living expenses, therefore families look for other options.

Alternatively, there are private student loans. Private student loans tend to be more expensive, and they’re always less consumer-friendly than federal student loans. The terms of the loan contract are based on the lender’s assessment of the borrower and their credit worthiness, as well as interest-related market factors. In that way, private loans are more like other kinds of consumer debt, such as credit cards. Private loans are usually at variable interest rates; people may see that their interest rates can change over time, and sometimes they can go up without any cap. Also, private loans typically require cosigners. Cosigners need to know that they are on the hook for the debt just as if they had borrowed it directly.


Q
What are the different repayment options and what’s the best way to start paying off student debt?
A

The first thing to do is to get a clear inventory of your student loans. It’s not unusual to be confused because you can borrow two, three, four, or more kinds of loans each semester, so by the time you get out you may have an array of loans. Visit the National Student Loan Data System, which will show you all of your federal student loans. To get a clear sense of your private student loans, it’s necessary to get a copy of your credit report, which people can do for free at annualcreditreport.com.

Know what your balances and interest rates are. For federal loans, there are a lot of options and flexibility for repayment; you can nearly always find ways to make your payments affordable, or even temporarily postpone them, even if you’re in trouble or have had a delinquency or a default on a federal loan (those can almost always be cured by taking certain actions). The worst thing to do with student debt is to ignore it and stick your head in the sand, which can cause all kinds of problems with fees and collection costs down the line. You should get informed about whether you can benefit from any of the loan forgiveness provisions that are attendant to federal loans. If forgiveness doesn’t pan out, create a payment strategy for minimizing your cost over time.

Q
Which common mistakes do you see people make with their loans? How can they be avoided?
A

People often put too much trust in their loan servicer, which are companies hired by lenders and the federal government to administer the loan program. These are the companies to which you make your payments. (The federal government hires a variety of companies to administer the federal loan programs because they do not have enough government employees to handle the volume of work.) Many people have to rely on the loan servicers as their source of information, but the interests of the loan servicers are often not well-aligned with the interests of a student loan borrower. Their job is to collect on the loans, and the advice and council that they give borrowers is often inadequate.

Another common mistake I see people make is thinking that they’re in a system that’s going to make sense or be smooth—and unfortunately that’s just not the case. It is important for anyone with student loans to recognize that we must each as individuals take it upon ourselves to get the information we need. We need to figure it out ourselves, to do the research and ask the questions until it all makes sense. And the reality is this can take a long time.

Lastly, I commonly see people fail to maintain contact with their loan servicers. For instance, they could change their address right after school and forget to update all the loan entities they want to be in touch with. Failing to be in touch with your loan provider can cause missed deadlines and result in having to pay more than you should.


Q
Can you break down how loan forgiveness works?
A

Federal student loans have two main student loan forgiveness opportunities. One relies on how your income compares to your student loan balance over time. If you choose an income-driven repayment plan for your federal loan (there are many), your monthly payments are tied to your income. If you make payments on your loans as required, for a long time, and you still owe a balance, then the balance is eventually forgiven (under the current scheme). This can take twenty to twenty-five years’ worth of payments, depending on the plan.

The other main provision for forgiveness for federal student loans is the public service loan forgiveness. This is available for people who have careers in nonprofit or government settings. To earn forgiveness, many, many conditions must be met so, again, people should get really clear on every aspect of the program and whether they might qualify.


Q
Is bankruptcy ever a good option?
A

Bankruptcy is available for very few student loan borrowers in certain, very extreme circumstances. You have to show what is called an undue hardship in most jurisdictions, which has been interpreted very narrowly. You have to be very financially distressed and unable to make adequate money—and have no prospect of that changing in the future. So bankruptcy is rarely effective for people with student loans. The better option is to recognize that the income-driven plans can be ideal for people who can’t afford their loans because their income is not adequate. Choosing an income-driven plan is usually a better option than choosing to postpone your payments altogether. Federal loans have opportunities to postpone payments, which are called deferments and forbearances, but these can get very expensive over time because for most student loans, interest continues to accrue all the time. Default also has significant costs and consequences. So it’s best to avoid the default, if possible, particularly on federal student loans, since the government has extraordinary collection authority.

If you have both types of loans, private lenders are very reluctant to work with borrowers to modify the terms of the loan; they are notorious for not offering affordable repayment options. Therefore sometimes (and I don’t mean to say this should be frequent), for some people, the federal loans should be a higher priority to pay over the private loans. If you have to make difficult decisions about what bills to pay and what bills not to pay, after paying for essentials, like housing, food, transportation, and health care costs, then it’s best to pay high-priority debts like taxes, mortgage, and federal student loans, followed by medium- and lower-priority debts, like private student loans and other consumer debt. If you avoid payment on a federal student loan, the federal government can start employing collection activities before getting a court order. The government can seize tax refunds, garnish wages, and take portions of Social Security and other federal benefits.


Q
What advice do you have for someone looking to go back to school? How can you make sure you don’t overborrow or overspend?
A

First, you should fill out the application for federal student aid—the FAFSA—because that is what makes you eligible for all the free money that may be available in terms of grants or scholarships, from both the federal government and also the colleges and universities (the schools themselves are typically the places that have the most money to give). Next, consider the price of the institutions that you’re considering—and recognize that the cost can vary dramatically. Shop around and look for what has the programs and features you need. For some, community college can be a way of getting some credit more affordably–and often, state-supported university systems have lower prices than private institutions.

People should be particularly wary of the for-profit education sector—I’ve consistently seen some of the worst financial outcomes from those schools. I’ve seen people borrowing more money in student loans and being less successful in repaying them. And many of those for-profit schools tend to spend a lot more on marketing than they do on curriculum.


Q
Any favorite resources?
A

When it comes to the federal student loan system, people should be aware of the official information published by the government on its websites. This includes:

  • studentloans.gov: The Federal Student Loan site includes information on repayment plan applications and a repayment estimator tool.
  • Studentaid.edu.gov: Includes lots of information for people thinking about the various ways people are paying for school.
  • NSDLS.ed.gov: An essential resource that gathers data from schools, the Direct Loan program, and other Department of Education programs.
  • And there is also useful information available from the National Consumer Law Center:

  • Studentloanborrowerassistance.org: Provides a wealth of information for student loan borrowers and their families. It’s especially useful for people who are struggling financially.

Heather Jarvis is an attorney and a nationally recognized expert specializing in student loan law. She’s provided student loan education and consultation for universities, associations and professional advisors. Widely recognized as an expert source of information, Jarvis has advised congressional committee members and administrative officials on issues affecting student loan borrowers. She graduated cum laude from Duke University School of Law in 1998.

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