Compare Student Loan Debt Relief Solutions
Compare Student Loan Debt Relief Solutions
Student loan debt is at an all-time high. It has become the second largest source of consumer debt ( mortgage debt is the first) and is a tremendous burden on 45 million borrowers. It’s no wonder that getting out of student loan debt is a top priority for many consumers.
Fortunately, there are multiple student loan debt relief options for borrowers. Determining the one that’s best for you will depend on several factors, including how much you owe, whether the lender is federal or private, and whether or not you have a good credit score.
Find the best solution to pay off federal and private student loans.
The burden of student loan debt
Do you feel like your loans are keeping you from living your life? If so, you are not alone. Consumers say that more than 20% of their take-home pay goes to student loans, with an average monthly payment of $541 (for a bachelor’s degree).
The pressure on people’s pockets has affected their ability to prepare for the future and enjoy the present. Student debt has taken a toll on consumers’ ability to establish financial safety nets:
- 84% of adults say student loans have affected their ability to contribute to savings or retirement.
- Non-college graduates in their 30s have twice as much money saved for retirement as their college-educated counterparts.
Numerous studies confirm that education-related debt is a major factor delaying major life milestones such as getting married, starting a family, and owning a home. It also reduces the likelihood of people becoming entrepreneurs or pursuing creative careers.
National Statistics on Student Debt
- Over the past decade, the national total has increased by an average of $78.7 billion each year, reaching an all-time high of $1.75 trillion in 2021. [ 5 ]
- 65% of college students graduate with debt. [ 5 ]
- Borrowers take an average of 20 years to pay off their debt. [ 5 ]
- The average student loan balance is $40,904; the average federal student loan balance is $37,014. [ 5 ]
- The interest earned represents 67.1% of the total payment (the average borrower pays $26,000 of total interest at an average interest rate of 6%)
- 11.2% of borrowers failed to make at least one payment in the last year.
- 7.8% of the federal debt is in arrears.
- First-generation college students are twice as likely to be late on a payment.
- Only 6.7% of eligible borrowers apply for loan forgiveness, and only 1% of applicants have been approved.
Then there are the unpleasant consequences of being behind on student loan payments. If you have defaulted on student loans, the Department of Education can garnish your tax return or garnish your wages without permission or notice. Those late payments will also take a toll on your credit score, which can drive up the cost of borrowing. Plus, you’ll lose the chance to get new federal student loans until you catch up on the ones you already have, which isn’t an ideal situation if you’re thinking of going to graduate school or need to help your kids go to college. college.
Do student loans affect your credit score?
Yes, student debt affects your credit score, but it’s not always in a negative way.
How student loans help your credit:
- They are usually the first lines of credit in most people’s credit history, an important aspect of the credit score formula
- They are an example of “ good debt ”; they typically have low-interest rates and are an investment in your future (a college degree can increase your lifetime earning potential)
- Making payments on time will add positive feedback to your credit history and show other lenders that you are trustworthy.
How Student Loans Hurt Your Credit:
- They are included in your debt-to-income ratio (DTI). If your DTI is too high, it can make it harder to get big loans like a mortgage
- Monthly student loan payments can be a significant part of your income.
- Failure to make payments will cause negative marks on your credit score
How to get rid of student loan debt
There are several student loan debt relief options: refinancing, consolidation, liquidation, or bankruptcy. And yes, despite what you may have heard, it is possible to get rid of student loan debt through bankruptcy, you just have to go through a lot of complexities.
Determining the best route for you will depend on:
- If you have federal or private loans
- How much can you pay each month
- The significant impact on your credit score that you are comfortable with
For example, trying to get $5,000 in loans forgiven through bankruptcy or settlement could be overkill. Would it be worth having such a small amount of debt cause significant damage to your credit and remain on your record for seven years? Getting rid of student debt is a balancing act between saving money and contemplating how a particular strategy will affect current and future financial circumstances.
Option 1: Refinance student loans
Student loan refinancing occurs when multiple loans, either federal and/or private, are combined into a single loan with a new and, ideally, lower interest rate from a private lender. The federal government does not offer refinancing for federal loans; refinancing can only be done through a private lender, which has its advantages, but also some potential drawbacks.
The good thing about refinancing student loans
Advantages: Those who refinance can choose a fixed or variable APR to obtain a very competitive new interest rate. People with good and excellent credit scores benefit the most from refinancing, as private lenders determine their interest rate based on market conditions and a person’s creditworthiness. But if market interest rates are low enough, even people with poor credit scores can get a good APR.
Another advantage is a greater range of payment terms. While the standard repayment term for federal student loans is 10 years, private lenders offer repayment periods of 5, 7, 10, 15, 20, or 25 years. This means you can get a time frame that fits your budget and goals. A longer term will offer lower monthly payments, or you can choose a shorter term to get out of student debt faster.
Finally, refinancing can be very good for your pocket. By combining multiple loans and moving to a single monthly payment, there is an opportunity to save significantly compared to paying the minimums on multiple individual loans.
The downside of student loan refinancing
Now, the downsides of refinancing . The largest is for those who refinance federal student loans. While refinancing can make repaying student loans much more convenient and affordable, it also means giving up federal student loan benefits like forgiveness programs or income-based repayment options. Because of this, many borrowers are selective about which student loans they include when refinancing, choosing to refinance only their private loans.
Be sure to carefully consider the choice between a fixed or variable APR. Variable APRs are tied to the market and are subject to fluctuations. Your new refinanced interest rate could be significantly lower than your original loans when you initially refinance them, but that rate could be updated to be even higher than your original interest rate if the market changes. However, you are not completely at the mercy of the market, private refinance lenders often provide a range of APRs, so there is a limit to how high you can raise your interest rate.
The refinanced loan is considered a completely new line of credit and will be reflected as such on your credit report. If federal loans are refinanced, the private lender pays the remaining debt directly to the government, which closes those accounts. The private lender then issues a new loan with your institution in your place. Closing old accounts and opening new ones at the same time won’t do your credit score any favors. Credit age accounts for 15% of the FICO score, and for most people, their student loans are the oldest and most established accounts.
Refinancing could be for you if…
- You currently have several private loans with variable rates
- Not eligible for any federal loan forgiveness programs
- You have good credit (or a cosigner)
- The interest rate on the refinance loan is significantly lower than your current loan