Managing Student Loan Debt

 

 

Budgeting – The First Step to Managing Debt

 

The root of any financial management is budgeting.  In order to get your financials in order and keep them in order a budget needs to be created, and then more importantly adhered to.  With a good budget, a borrower must take an honest look both their monthly income and expenses.  Income needs to be net income after all deductions and include all income in the household. 

If any part of the income is not regularly made it shouldn’t be added to this category.  For expenses, you need to go back at least 6 months and examine everything.  Expenses need more than one category for fixed expenses that are long term regular monthly expenses like a house payment, and non-fixed expenses that are random, sometimes one-time expenses that you have more control over whether or not they are needed. 

Another aspect of any good budget is planning for the future and incorporating your financial goals.  With your finances you need to know where you’re going, what it all is going towards in order to establish a budget.  Financial goals are likely to change over time, so adding goals that occur over a period of time or even re-working your budget to include or change a goal is advisable.  There are many budget calculators and guides that can be utilized on the internet to make the process a lot simpler. 

 

Debt Management Options When You Can’t Make Payments

 

The first step to take if you find you’re not able to cover the expenses of your loan is to make your lender aware of this fact.  They can work with you on finding a way to make payments work.  Two options available to borrowers who haven’t yet defaulted on their loan are deferment and forbearance. 

Deferment is a way to temporarily postpone making payments on your loan. 
If you have a current financial strain forbearance also acts a way to temporarily halt making payments, but with this option the borrowers must keep making payments on the interest that accrues. 

It is also advisable for a borrower to pay on the accruing interest that builds when deferment is used on unsubsidized loans in order to avoid further build up of debt.  Both deferment and forbearance is at the discretion of the lender and federal loans tend to offer these options more readily.

 

Student Loan Repayment Options

 

Another way to manage your loan payments is to revisit your repayment options.  Depending on the terms of the student loan you chose, there are a number of ways your loan can be repaid other than the standard, fixed amount payment.  However, it should be noted that private loans tend to have fewer repayment options than federal loans, and it’s also much easier to change your method of payment with a federal loan. 

Extended Repayment Option

An extended payment option will make your loan more expensive in the end because of the added interest, but it will also lower your monthly payment.  Borrowers need to carefully weigh whether the lower payment is worth the added cost. 

Graduated Repayment Option

A graduated payment method in which the borrower pays lower monthly payments that slowly increase over the life of the loan may be a better option if the borrower is in a temporary financial crunch.

Income Contingent and Income-Based Repayment Options

There are also repayment methods that are based on the income the borrower is earning so that the monthly repayment amount fits into what is financially feasible for the borrower.  With income-contingent repayment lenders consider the borrowers income and their debt load to reach a monthly payment reasonable for both parties.  In 2009 a similar option called income-based payment will become available as well. 

However, the one drawback to these two programs is that lenders require the borrowers to extend their loan to 25 years which means like the extended payment option the loan will cost more in the long run.