Student Loan Payment Woes

Running into problems making your student loan payments? This is something so many recent college graduates encounter. You graduate and get a decent job and it sinks in: “I don’t make enough to pay my bills and pay back my loan!” Well it is tough, but if you’re a working college graduate and living paycheck to paycheck, you have look at how you got yourself in this situation in the first place. Maybe you’re paying too much for rent? Maybe you don’t need the high definition cable package with 300+ channels? Maybe you’re buying one too many half price pitchers with your work friends at happy hour? Remove all those factors and you might just have the money to pay your student loan. The first thing to look at is how often you go out to eat or spend money on frivolous things. Once you realize how much money you waste even on buying things like bottled water or coffee at the local convenience store, you’ll realize that by eliminating frivolous expenses, you just might be able to afford your bills.

A great way to track this stuff is to get a copy of an inexpensive financial software, like Quicken, because when you input all of your things and then classify them, it will show you a pie chart of how you spend your money. Then when you realize that 10-15% of your income is going towards dining (and trust me, I’ve been there! Hah!) you’ll find more motivation to stop eating out.

If you have made all the lifestyle changes you can and you’re still not making it and ending up with late payment history or worse, your loan goes into default. In the case of a bad payment history, try to work out payments you are able to afford and stick to that schedule of payments. Get a second job if you have to, but stick to it. If you have defaulted, you may be able to rehab the loan. Under the loan rehabilitation program you and your loan holder agree on a reasonable and affordable payment plan for nine (9) consecutive payments. In most cases, you sign a rehabilitation agreement specifying payments and responsibilities. A loan is rehabilitated only after you have voluntarily made the agreed-upon payments on-time for 9 consecutive months. The standard payment would be at 1% or you can demand reasonable and affordable payments for rehab under the Higher Education Act, which may lower your payment.

Another possibility is consolidation where the loans are transferred to the Department of Education under The William D. Ford Direct loan program (FDLP). Defaulted borrowers can consolidate with the FDLP if they accept income-contingent repayment (ICR). Under ICR, you would pay the monthly interest until they determine your payment amount based on documents of income. But based on your income, these payments could end up being more than was is required originally. Consolidation rate is weighted average of the rates of the loans included, rounded up to nearest 1/18th of a percent, not to exceed 8.25%. Examples:

1) 2 variable-rate Stafford loans currently at 7.14% are consolidated at 7.25% fixed.

2) 1 GSL at a fixed rate of 14% (Interest rates were very high in the early 1980s and there are indeed some loans with rates like this) is consolidated at 8.25% fixed.

3) 10 Perkins loans at 5% fixed are consolidated at 5% fixed.

Rehab is definitely a good option if your loan has gone into default, but once the loan is rehabbed you’ll have to keep it out of default. No excuses this time. If you’re serious about paying back your loan, you can do it. Borrowers who rehab at a payment amount similar to the payment amount they would have on one of the plans available to them after rehab almost never default a second time. Borrowers who are allowed to pay less due to circumstances that would not entitle them to a deferment (cable, internet, happy hour pitchers, and rent far outside a normal budget based on their income) almost always default again.

Be real with yourself about your money and your expenses, and you can achieve a debt free lifestyle eventually.

Written by Jim on July 31st, 2007 with no comments.
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