Student loans now have the potential to cost the federal government an estimated $100 billion as more borrowers opt for lower income-based payments and eventual loan forgiveness. That's the conclusion of a new report by the Government Accountability Office.
With more than $1 trillion in student loans outstanding (93 percent of recent loans come from the federal government), an entire generation has graduated into debt that may not be easy to repay.
Federal student loans carry high rates, and filing for bankruptcy rarely lets borrowers off the hook. But federal student loans do offer some payback alternatives, including deferral and forbearance. The most popular program is income-based repayment, which caps loan payments at 10 percent of disposable income, with forgiveness of the balance after 20 years of payments. An estimated 24 percent of recent grads have opted for income-based repayment.
It's expected that the Trump administration will try to shrink federal involvement in student loans, driving borrowers to the private market and lenders such as Discover, Wells Fargo and Sallie Mae.
Private student loans don't offer generous payment reduction options. Lenders require most private student loans to have a cosigner. It's almost impossible to refinance private student loans with the original lenders, and aside from a quarter-point break on the rate if you pay though an automatic monthly deduction, you'll likely be stuck with your original deal.
Private student loans are considered to be in default after 120 days of nonpayment (it's 360 for federal loans). If you default on a private student loan, the lender will go after your cosigner, likely your parent. They can add fees and charges that run up the balance or turn your account over to a debt collector and ruin your credit. And it's almost impossible to erase the loan through bankruptcy.
If you have a student loan coming due, what should you do?
Get organized: Loan repayments must start six to nine months after graduation. Either use a spreadsheet (there's a useful one at Edvisors.com) or create your own list, including the name of the lender, the account number, the amount outstanding, rates and payment due dates.
Note: If you can't remember all of your loans, go to the National Student Loan Data System at NSLDS.ed.gov to find a record of all your federal and private student loans.
Choose the shortest term option: Stretching out your payments over 20 years will cost you a fortune in interest over the loan run. To see the impact, check out the loan repayment calculator at Finaid.org.
Consider the alternatives: That same Finaid loan calculator will also show you how to make payments more affordable through income-based reduction. Learn more at IBRInfo.com.
Know your options with federal loans: Beware of consolidating them into a private loan and losing options. However, consolidating your federal loans could simplify the repayment process. The interest rate on a federal consolidation loan is based on the weighted average of the interest rates on the borrower's loans, rounded up to the nearest 1/8th of a point. Consolidate federal loans at StudentLoans.gov.
Investigate private student loan consolidation and refinancing: At PrivateStudentLoans.com, you can learn about the limited possibilities of consolidating these loans. And if you have a good job and good credit, you might be able to refinance your private or federal student loan at significantly lower rates at SOFI.com.
Don't be in denial about your student loans. Start the process now, consider alternatives carefully and make your education pay off by making smart repayment decisions. And that's The Savage Truth.
Terry Savage is a registered investment adviser. She responds to questions on her blog at TerrySavage.com.