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Managing Student Loans: 3 Things to Consider

Thank you student loans for helping get me through college. I don’t think I can ever repay you. Those of you who feel like your student loan debt is weighing you down today are certainly not alone. Currently, more than 40 million Americans hold student debt. As of 2012, 71% of students graduated with student loan debt, and the default rate on this debt is a whopping 14%. In 2013, the Social Security benefit checks of 150,000 people were garnished because of student loans. And, no, bankruptcy is not an option. (For more, see: Student Loan Debt: What Every Borrower Should Know.)

Best Course of Action?

Yes, student loan debt can be cumbersome and unwanted. But there are steps you can take to potentially lessen the burden. Two questions I hear frequently in regard to student loans are: “Should I look into refinancing student loan debt?” and “What balance of cash flow should I put towards student loans versus retirement savings?

I wish I could simply tell everyone to follow a particular set of rules in regard to student loans but the best course of action, as it usually is in personal finance, will vary depending on the individual. The best approach may be to sit down with a professional for a consultation and planning session. (For related reading, see: 6 Life Events That Call for Professional Financial Advice.)

3 Things to Consider

Although I can’t provide you with a single, concrete solution for your student loan debt in this blog post, these are the three most important conclusions I've reached during my research on the subject. 

  1. The income-driven repayment options available on federal loans (IBR, PAYE, REPAYE, etc.) can be confusing but if you’re paying more than 15% of your discretionary income (research discretionary income calculation for your family size) towards student loans, you probably have a relief option in the form of one of the income-driven repayment options on your federal loans. You are also able to modify your payment plan as your financial life evolves.
  2. Refinancing is a viable option. You must know that you lose all of the protections of federal loans (income-driven repayment, deferment, forbearance, forgiveness), but for someone with a steady job, solid credit and paying 6% or more in student loan interest, you potentially have a better option.
  3. In order to qualify for a refinance, shore up your credit first. I interviewed an underwriter at SoFi, a leader in student loan refinancing. I was told that a requirement for new borrowers is that they cannot have a delinquency on their credit report in the 24 months prior to SoFi granting them a loan. You can visit Federal Student Aid to get an itemized list of all of your federal loans. For private loan information, you can request a free credit report from Annual Credit Report.

If you plan your finances appropriately, you can manage your student debt until it is fully paid off. It is important to customize your loan payment plan in a way that fits your unique financial situation, and regularly monitor your progress and adjust your plan as your financial live evolves. A goal without a plan is just a wish. Ultimately, the increased income and career satisfaction that your student loan-funded education enables you to achieve will last indefinitely. (For related reading, see: 5 Financial Strategies to Last a Lifetime.)