(Photo By Flickr User CafeCredit.com)
According to a recent article by the Wall Street Journal and myclarionnews.com, about 25 percent of student-loan borrowers are in default or behind in making payments. Student loan debt is five times what it was just two decades ago. The real problem, note the experts, is that many borrowers are making avoidable mistakes in managing their academic debt. The WSJ’s Anne Tergesen writes that students should avoid the following common failures when juggling their loan payments:
1 – Failure to use an income-driven repayment plan, instead of graduated payments. Based on a plan that repays at 10-15 percent of discretionary income, the borrower will have more funds to set aside in a retirement plan than graduated repayments – which can rise faster than income.
2 – Failure to understand the loan. Is it private or government-backed? Different types of student loans offer different types of repayment plans and interest rates. For federal loans and rates, go to nslds.ed.gov. Knowing the interest rates can help the borrower decide if to consolidate or refinance loans. Use an online repayment estimator at studentloans.gov. Stay away from debt-relief agencies that charge fees to help with student loans.
3 – Failure to use student-loan forgiveness programs. Take advantage of the plethora of companies and organizations (U.S. military, etc.) that help with repayment. The Public Service Loan program offers debt reduction and/or forgiveness for students entering certain professions, such as teachers, doctors, etc.
4 – Failure to make retirement savings a priority. According to the WSJ article and other studies, paying into a retirement fund is just as important as making student loan payments. The WSJ’s Tergesen says that many students spend too much of their income on making loan payments – at the detriment of retirement. Many companies offer matching funds for retirement, some as high as 6 percent. That’s free money that will gain interest for many years.
5 – Failure to set loan payments on automatic. Once a good repayment plan is adopted, borrowers need to take advantage of automatic payments. Just like E-Z pay for bills, putting student loan payments on automatic helps to avoid late payments and the bad credit that results from delinquent payments. Auto-pay can also attract lower interest rates.
Take advantage of the programs that are aimed to alleviate the burdens of student debt. Understand the loan, interest rates, repayment schedules, and the importance of setting aside retirement funds. For more information, go to studentaid.ed.gov.
