How to Handle Your Massive Student Loan Debt

Nearly 44 million Americans have student loan debt, leading to a total over $1.4 trillion. On average, that’s $37,172 per person, not to mention a 11.2% delinquency rate.

How to Handle Your Massive Student Loan DebtUnfortunately, there seems to be no end in sight to the escalating costs.

From 2012 to 2017, the average cost of a college education increased by an average of 9% per year. To put this into perspective, the growth in the cost of an average home during this period was about 5.6%, according to data from Zillow Group, Inc. (NASDAQ:Z).

For students headed for graduation this year, it seems like things are kind of grim, right?

In the short-term, yes, but in the long-term, the story is different. Numerous studies show that a college education is a solid investment. According to the Council of Economic Advisers, the earnings for a college graduate are more than $1 million versus those with a high school education. Whereas, the earnings increase is only $360,000 for those who obtain an associate degree.

In the long run, this is pretty good news for recent graduates … even those who have student loans in the six figures.

Besides, there are plenty of strategies to help deal with the costs. Let’s take a look:

Student Loan Debt Tip No.1: Your Contact Information

It seems kind of obvious: Make sure you update your information for your loan, such as a change in address and phone number. But this can be extremely important. The reason is that the consequences of missing loan payments can be severe, like the following:

  • Late fees
  • A hit to your credit score
  • The possibility of being denied rebates and interest rate decreases
  • Seizure of your assets through liens and levies (this usually happens after the loan is in default, which comes after you miss payments for more than 270 days).

To help avoid all this, you can setup an automatic payment program that debits your bank account. Consider that you may get a bit of a break, such as a small reduction in the interest rate (as much as 0.25% on a federal loan and 0.5% on private loans).

Student Loan Debt Tip No.2: The Grace Period

After graduation, you may get a grace period, which means you can wait for a period of time until you need to start making payments. This varies based on the type of loan. For example, a Stafford loan has a grace period of 6 months, while a Perkins loan is for 9 months. If you have a private loan, the terms can vary.

A grace period may seem like a good idea, but there’s a hitch. Even though you do not have to make loan payments, the interest is still added to your loan (with a few exceptions). In other words, if you have the ability to make payments, it’s probably a good idea to do so during the grace period. It will mean that your total interest payments will be lower for the life of the loan.

Student Loan Debt Tip No.3: Payment Strategies

The standard payment plan for federal student loans is a ten-year term. While this is fine for many people, there are still various other options to consider. As with anything, you need to take note of your particular situation and income prospects. Of course, things may change, and the good news is that you should be able to make an adjustment based on your needs.

Here’s a look at the different options available (note that these are for federal loans):

Pay As You Earn (PAYE): This allows you to base your payments on your income and there are various approaches, such as Income-based repayment (IBR) and Revised Pay As You Earn (REPAYE).

But for the most part, a PAYE plan allows a person to cap payments to 10% of income. There may also be a provision that provides forgiveness of student debt after 20 years, but you will be required to pay taxes on this amount.

It’s true that a PAYE plan ultimately means shelling out much more in interest. However, if your income is expected to remain low for some time, this could be a viable option.

The following online calculator can help out.

Graduated Repayment: With this plan, you will pay off your loan in ten years, but the payments will increase over time (usually every two years). Even though this may increase interest costs, the approach could mean less financial stress. After all, a person’s income after graduation is often far from substantial.

Extended Student Loan Repayment: This plan provides for a term of 25 years. Because of this, the monthly payment will be lower. But given the prolonged term of the loan, the overall interest costs will likely be much higher than a standard 10-year term.

Student Loan Debt Tip No.4: Prepayments

Along the way, you might also want to make prepayments on your loan, say if you get a financial windfall. But make sure it will be applied to your loan balance, which will ultimately reduce your overall interest expense.

Or, if you have multiple loans, focus the additional payment on the debt that has the highest interest rate.

Student Loan Debt Tip No.5: Consolidation

It’s often the case that a student will take on multiple loans. But with consolidation, you can combine these into a single loan (this is called a Direct Consolidation Loan for federal loans). This makes things much easier, as there will only be one payment and the interest payment may be lower.

But there are some things to think about before taking this approach. First of all, if you have federal direct loans, there will not be a reduction in the interest rates for each loan. You will actually need to pay a fee for the consolidation, though it is fairly small.

As for private loans, there is no consolidation program. Rather, you will refinance the student loans, which could mean getting lower interest rates and payments. But there are some “gotchas” to this. For example, the rates can vary and some of them may not be fixed, which means the loan could ultimately result in higher costs (assuming that interest rates increase over time).

Another thing to consider: It’s usually a bad idea to combine federal loans with private loans when refinancing. Why? You will likely lose important benefits, such as loan forgiveness options.

Student Loan Debt No.6: Relief

Over the years, the federal government has instituted various programs to help deal with costs of student loans. For example, if you decide on a career that does not provide high levels of income, such as working for a nonprofit, a school or a local government, then part of the debt could be eliminated with the Public Service Student Loan Forgiveness (PSLF) Program (you can find out more about this here).

Next, you may be able to defer payments if you are unemployed or have health problems. However, this process can be tricky and may require that you provide evidence of your situation.

And what if you cannot get a deferment? Well, in this case, you might be eligible for forbearance. Like a deferment, you will not have to make payments, but the interest will still accrue. Ultimately, the hope is that your hardship will only be temporary, so the overall costs of the loan may not be so bad.

Keep in mind that all of these apply to federal loans. Still, a private lender may still be amenable to some type of forbearance, but there will probably be a fee required.

Tom Taulli runs the InvestorPlace blog IPO Playbook as well as, which provides interactive tools & services for employee stock options of pre/post IPO companiesFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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