How You Can Hack Away at That Massive Student Loan Debt

NEW YORK (MainStreet) – There are several ways to fix student loan debt problems. None of them could be defined as “quick.”

According to a report released by the Federal Reserve Bank of New York in February, student loan debt has climbed to $1.16 trillion. While still a distant second to U.S. mortgage debt ($8.17 trillion), it now exceeds the total value of every U.S. car loan ($955 billion), all credit card debt ($700 billion) and all home equity loans ($510 billion). It's also just shy of all the money ($1.3 trillion) the Federal Reserve has in circulation. If that student loan debt grows by another $33 billion, as it did last quarter, every dollar bill and handful of spare change in the country couldn't pay it.

Even worse, more than one in 10 (11.3%) student loans are past due. By comparison, the U.S. doesn't have that difficult a time paying its credit card bills, which are the second-most delinquent loans with 7.3% past due.

“Although we’ve seen an overall improvement in delinquency rates since the Great Recession, the increasing trend in student loan balances and delinquencies is concerning,” said Donghoon Lee, research officer at the New York Fed. “Student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households.”

Especially with the sheer amount of debt that graduates are shouldering. For older folks who can't see the big deal about paying student debt, student loan and financial advice site Edvisors.com would like to remind you that just 20 years ago, average student loan debt was $12,759 and just 54% of all students graduated with debt. This year, the average student loan debt for a new graduate with a bachelor's degree is $33,050. That debt is being carried by 70.2% of all graduates.

“So long as total student loan debt at graduation is less than the borrower’s annual starting salary, the borrower should be able to repay his or her student loans in 10 years or less,” says Mark Kantrowitz, senior vice president and publisher of Edvisors.com. “If total debt exceeds annual income, the borrower will struggle to repay the debt and will need an alternate repayment plan, like income-based repayment or extended repayment, to afford the monthly loan payments.”

That's no small condition. While the Bureau of Labor Statistics puts the current unemployment rate at 5.5%, that jumps to 10% for people ages 20 to 24 — or roughly the age of most recent college graduates. Only 63% of people that age are an active part of the workforce, compared with more than 75% of folks between 25 and 54.

”We're even hearing that young people are skeptical about their ability to settle down and start a family,” says Jennifer Wang, policy director at Washington, D.C.-based youth and student advocacy group Young Invincibles. “A lot of young people have told us that they don't think they'll ever be able to afford to get married or that they don't think they'll be able to have families of their own. It's probably the pocketbook issue for our generation.”

With help from Edvisors, The Institute For College Access and Success' Project on Student Debt and Young Invincibles, we came up with a few strategies for attacking student debt. None are easy, but all can help students chip away at their burdens and finally make their educations pay off:

Get organized: At the very least, The Institute for College Access and Success says you should know who your lender is, how much you owe and how much you have to pay off. You can suss out a bunch of those loan details with help from the National Student Loan Data System, including loan grace periods, but missing information and questions are a lot easier to handle when you keep in touch with your lender. That means reading your mail, answering their phone calls and generally being an adult.

Aim for 10 years: It seems daunting, especially for those with heavy burdens and minimal employment, but it saves you a ton of interest payments and gets that loan off of your back a lot faster.

Sometimes, that requires help. Kantrowitz suggests seeking credit counseling through a nonprofit counselor and drawing out a budget to determine whether you should be taking the bus or train instead of a car, living with roommates (or your parents) instead of on your own and learning to cook a bit better rather than eating out. Also, don't be afraid to use the annual $2,500 student loan interest deduction from the IRS to help pay down your debt. Even if none of those options pan out, there's still a chance to …

Pay the right way: Don't take on a standard 10-year repayment option if you can't afford it. Income-driven repayment plans such as Income-Based Repayment and Pay As You Earn cap your monthly payments at a percentage of your income each year (10% of monthly income in the case of the latter) and forgive remaining debt after no more than 25 years (depending on the plan).

”Student loans, particularly the financial-aid market, is very complex,” Wang says. “That's particularly dangerous for our generation, because we're the ones who are going to have the larger balances of student loan debt. If young people don't understand their repayment options, that's a huge problem.”

Go automatic: Kantrowitz notes that borrowers who repay their student loans through automatic monthly transfers from their bank account straight to the lender are less likely to miss a payment and, in many cases, may get a slight interest rate reduction on the loans.

“Not only will you be less likely to be late with a payment, but most lenders will reduce your interest rate by 0.25% or 0.50% in exchange for making the payments through auto-debit,” he says.

Consider consolidation: This basically just refinances all of your little loans into one big one, but there's a chance it will reduce your interest rate if your credit score has improved since college. If you've consistently chipped away at all of your debt since graduation, there are a lot of consolidation options out there.

Embrace the good times: When you finally do get some money coming in, Kantrowitz suggests attacking student loans by making extra payments toward the principal of the loan with the highest interest rate. Since there are no prepayment penalties for either federal or private student loans, knocking down the ones charging you the most interest isn't such a bad strategy. But you can either consolidate or go after the big dog; there's really no way to do both.

Exploit the loopholes: If employment or lack thereof is holding you back, put that down time to better use. By volunteering through the Peace Corps or AmeriCorps, you can earn an education award to pay down student loan debt.

If you're having a hard time finding a job or just need some direction to help pay your loans, consider public service. The Public Service Loan Forgiveness program forgives student loan debt after 10 years of payments if you work full-time as a public school teacher, in public safety (police, fire, EMT), as a member of the U.S. Armed Forces, for city, county, state or federal government or for a 501(c)(3) tax-exempt charitable organization.

— Written by Jason Notte in Portland, Ore., for MainStreet

To follow the writer on Twitter, go to http://twitter.com/notteham.

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.

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