Student loans often help make it possible to earn a college degree, which over time can help you earn more. That’s if things go well.
But sometimes things don’t go as planned. You may have to drop out of school before you finish your studies. You may not land a good-paying job after school. Or you may discover you’ve borrowed more than you can pay back. In fact, two-thirds of college seniors who graduated in 2011 owed money for their educations, with an average student loan debt of $26,600 per borrower, according to the Project on Student Debt.
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Besides moving back in with your parents (if that’s even an option) and living off PB&J sandwiches while and putting every penny you can toward your debt, what are your options?
Fortunately, there are a variety of student loan repayment programs that may help you whittle down — or even wipe out — debt. They include:
1. Student Loan Forgiveness
A number of programs allow you to get some or all of your debt canceled if you qualify. Examples include serving in the Peace Corps or AmeriCorps; programs that allow a variety of healthcare professionals from doctors and nurses to dental hygienists and mental health workers to get a significant amount of their debt forgiven if they are willing to serve at least two years in an underserved community.
Teachers may similarly be able to get some student loan debt forgiven if they work in underserved communities — especially if they teach math or science. In addition, there are individual programs that may also help with student debt. For example, Yale Law School and New York University offer programs that allow some law school graduates who work in public service to get some of their loans canceled.
And members of the National Guard and military may be eligible for programs like the National Call to Service program which pays a cash bonus of $5,000 and up to $18,000 in student loan repayment. Finally, those who are totally and permanently disabled may also apply to have their federal loans discharged.
It may take you a while to find out whether you’re eligible for such a program. And if you do qualify, you may be taxed on the forgiven debt as if it were income. But it can still be worth the time and energy (and taxes) to wipe out these debts, especially when you consider you aren’t just eliminating the debt, but also the interest that would accrue on the balance in the future.
2. Income-Based Repayment
What happens if you don’t qualify one of those programs but your monthly payments on your loans are more than you can pay? You may want to look into the Income-based Repayment (IBR) Program. (The newer version of that program is called Pay As You Earn.) With these programs, you may be eligible for lower monthly payments on your federal loans, based on your income. If there is a balance remaining after you’ve made payments for a certain number of years (10, 20 or 25) it will be forgiven.
The length of time you’ll be required to make payments before the balance is forgiven depends on the type of work you do. If your job qualifies as a public service job (which includes certain law enforcement and teaching jobs, for example) then you may be able to get your balance forgiven after 10 years.
Also helpful: paying back your loan under IBR or PAYE does not hurt your credit scores as long as you make the reduced payments on time.
3. Student Loan Consolidation
It can be frustrating as a student loan borrower to learn that your options for refinancing these loans are limited. Unlike other types of consumer loans, which can be refinanced if interest rates drop (if you qualify), federal student loans are not as flexible. In fact, you generally get only one shot at this.
To refinance student loans you actually consolidate them. Some of the potential benefits of consolidation include:
- One monthly payment instead of many
- Lower monthly payments, by extending the loan term to up to 30 years
- Changing from a variable-rate loan to a fixed-rate loan
- Possible eligibility for other repayment plans such as IBR
However, there can be drawbacks as well. They include:
- More interest paid over time if the loan term gets longer
- Possible loss of valuable benefits such as interest-rate reductions or loan cancellation benefits, depending on which types of loans you consolidate.
How do you consolidate student loans? The Department of Education offers a helpful checklist for borrowers who are thinking of consolidating. If you decide to move ahead anyway, you will fill out a free application at the Department of Education website.
Student Loans and Your Credit Scores
Typically student loans won’t hurt your credit scores if they are paid on time, and they can often help your scores. If you fall behind, however, those late payments can cause your credit scores to drop significantly. For that reason, it is especially important to try to repay your student loans.
You can monitor your credit score once a month for free using Credit.com’s Credit Report Card. That way, you can see for yourself how student loan debt affects your scores.