President Barack Obama
announced on Monday that he is expanding the Pay as You Earn Repayment Plan,
which is geared to borrowers with low incomes compared with their overall
federal student-loan debt. The program lowers borrowers' monthly payments and
provides the opportunity of debt forgiveness.
There
were 190,000 borrowers enrolled at the end of March, according to the U.S.
Department of Education. The change could make up to five million more borrowers
eligible from 2015, according to the White House.
Still,
about 41 million borrowers had federal or private student loans outstanding at
the end of March, according to Edvisors.com, a Las Vegas-based college
financial-aid website. At the same time, student-loan debt reached a record
$1.2 trillion—all but $170 billion of it federal loans.
Losses are mounting as more
borrowers fall behind on payments. Ten percent of the 4.7 million federal
student-loan borrowers who began paying back their loans from October 2010 to
September 2011 had defaulted by Sept. 30, 2012, the Education Department says.
That is the sixth consecutive year of rising defaults.
Borrowers
have several options, even if they qualify for the Pay as You Earn program.
There are ways to lower your interest rate, extend your repayment period, pay
less each month—and in certain cases, stop making payments altogether for a set
period.
It isn't just former students
who are saddled with this debt. More parents and grandparents are signing up
for loans to help pay for students' college education. Parents who cosign
private loans end up on the hook if their children are unable to pay the loans
back.
Here
are the best options for lightening the load.
Lowering Your Interest Rate
A fixed
interest rate on a student loan isn't necessarily set in stone.
In many
cases, borrowers can refinance their loans to get a lower rate, or they can
consolidate all of their student loans into one loan with one fixed interest
rate. In most cases, there are no fees for either strategy.
Bachelor's
degree recipients typically leave college with anywhere from four to 12 loans,
says Mark Kantrowitz, senior vice president at Edvisors.com. Rather than making
several payments each month—one for each loan that they have—borrowers can make
one monthly payment.
They
will also end up with one servicer, which is the company managing their loan,
making it easier to work out a new payment plan and deal with other
customer-service issues.
In
March, Rheanna Cherinchak, 28 years old, consolidated 16 federal student loans
that she had signed up for while getting her undergraduate and graduate
degrees.
Ms.
Cherinchak, a high-school English teacher who lives with her husband near
Scranton, Pa., says she was concerned about managing each of the loans
separately and was hoping to make just one monthly payment to cover all her
federal-loan debt, which currently totals about $109,000.
"It
is helpful to see that number to make sure we're going in the right
direction," she says.
Some
loans aren't suitable for consolidating, says Lauren Asher, president of the
Institute for College Access & Success, an Oakland, Calif.-based nonprofit
that tracks student-loan debt. For example, federal and private loans shouldn't
be consolidated because borrowers will lose the repayment options that
accompany federal loans, she says.
Borrowers who consolidate federal student
loans will receive a new interest rate that is close to the weighted average of
the rates on their former loans. (They can apply for a consolidation at studentloans.gov.)
With private loans, the new interest rate
is determined by the borrower's credit score and current market interest rates.
Most private student-loan interest rates are based on the one-month London
interbank offered rate—the rate at which banks lend to each other—or the prime
rate.
Click here
for the full article in the Wall Street Journal.