As the cost of college and graduate programs continue to rise, student loans are becoming a commonplace in higher education. On average students from the class of 2014 owed approximately $29.000 in student loans. Collectively, Americans owe $1.3 trillion in student loan debt. The public college funding provided by the states has greatly declined over the last decade from 62% to 51%. According to a report conducted by the Institute for College Access & Success, “The shift in college funding from states to students has led to increasingly heavy burdens on students and families. After adjusting for inflation, per-student spending on colleges decreased 12% over the last decade, while the per student revenue coming from tuition increased 43%.”
Students who need to finance their education with student loans are often required to choose between federal and private loans. Private lenders control approximately 15% of the total student debt held nationwide. While private loans are a viable option for funding higher education, these loans do come with risks. Many private student loans market themselves with interest rates that are lower than federal rates. However, these low rates are given only to individuals with near-perfect credit scores. Less than 5% of borrowers receive the lowest rates for private student loans. Additionally, many private loans are set up with a variable interest rate. These rates may start as low as 2.5% but they may increase over time and borrowers could end up spending a lot of money to pay for a small loan. Variable interest rates could easily double or triple over the life of the loan and may lengthen the time needed to pay the loan back. However, some private loans are offered with a fixed interest rate or allow students to convert their variable-rate loans to a fixed interest deal. It is important to pay attention to the type of interest rate if taking out a private student loan.
Private lenders are offered the same protection from loan default as the federal government. In most cases, private student loans cannot be canceled or forgiven and in certain cases bankruptcy may have to be considered to discharge a private loan. It is possible to call the loan servicer and ask if relief is available if the borrower is struggling to make payments. Banks, including Wells Fargo and Discover, offer loan modifications or interest reductions for struggling borrowers. In extreme cases, some lenders may temporarily postpone payments. Federal forgiveness programs and income-based repayment options are not available for private loans. Income based repayment plans allow individuals to make monthly payments based on how much money she is currently earning. Federal forgiveness programs allow borrower’s remaining loan balance to be forgiven after 120 qualifying monthly payments are made under a 10-year repayment plan.
There are several things that borrowers can do to properly manage and pay off their private student loans. It is important to know how much and to whom money is owed. Checking credit reports often to see who is owed money and making before the loan becomes due may also help borrowers manage their student loan debt. If a borrower is in good credit standing, he could qualify to refinance his student loan to better terms. If the borrower qualifies for refinancing, companies such as SoFi and CommonBond could help him save upwards of $14,000 over the life of their loans. Borrowers may also put payments on auto-debit helps to eliminate the risk of missing payments. Certain lenders offer a .25% reduction on the interest rate if a borrower decides to enroll in an auto-debit program. Additionally, student loans that were borrowed from third-party lenders can be used for significant tax deductions for the students and their families.