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Are Student Loan Debt Problems Holding You Back?

Federal Reserve Chairman admits student loan debt problems may slow economic growth.

Student loan debt problems lead to empty

If you have student loan debt to repay, then you probably already know how much of a burden they create. What may be surprising to hear is that the new Federal Reserve Chairman Jerome Powell agrees with you. In fact, in one of his first economic speeches in his new role, Powell acknowledged that student loan debt problems are financially crippling millions of Americans. He also says if something is not done quickly, this issue could slow down economic growth.

How bad are student loan debt problems today?

Total student loan debt in the U.S. is set to surpass $1.5 trillion soon. In fact, we topped out at $1.38 trillion at the end of 2017. Roughly 44 million borrowers are in repayment and 11 percent have payments that are more than 90 days past due.  Statistics show that the average 2016 graduate owed $37.172 by the time they reached graduation.

Powell says while the problem doesn’t show up in U.S. economic figures yet, it’s only a matter of time.

“It’s not something you can pick up in the data right now,” Powell says. “As this goes one and as student loans continue to grow and become larger and larger, then it absolutely could hold back growth. You do see the longer-term negative effects on people who can’t pay off their loans. It hurts their credit rating, it impacts the entire half of their economic life.”

Powell acknowledges that millions of Americans are experiencing significant credit problems due to outstanding student loans. Missed payments can cause severe credit damage, making it hard to qualify for loans and even basic credit cards.

What’s more, student loan debt can keep you from getting approved for other loans that you need.

“If you want to buy a home or car, you must have a debt-to-income ratio that’s less than 41% with the new payments factored in,” explains April Lewis-Parks, Financial Education Director for Consolidated Credit. “But if you have high student loan debt, it can be almost impossible to qualify. It’s made even harder if you’re only earning an entry-level income, which is the case for most student loan borrowers.”

How to get ahead of student loan debt problems

“One of the biggest roadblocks to getting help is a lack of information about solutions,” Lewis-Parks explains. “People don’t know about the various student loan debt solutions available to them. Loan servicers have information about government relief options, but you usually have to ask to get it. As a result, people don’t connect with the solutions they need to find relief.”

How to get out of student loan debt fast

“If you’re not struggling to make payments, then you need solutions that help you get out of debt fast. You want to eliminate student loan debt quickly so your debt doesn’t affect your ability to borrow,” Lewis-Parks says. “This helps ensure that student loans don’t hold you back from key life goals, like buying your first home.”

There are three options that help you pay off student loan debt fast:

  1. Standard Federal Repayment Plan
  2. Graduated Federal Repayment Plan
  3. Private Student Loan Refinancing

The first two programs only apply to federal student loan debt. The first program is the fastest way to consolidate and pay off federal student loans. It divides your total debt out over 120 payments. Payments can be high, depending on how much you borrowed. That’s why this solution only works if you’re not struggling to keep up.

The second option is slightly slower than the first. With graduated repayment, the payments start low and then grow. Graduated repayment attempts to match payments to career advancement. Your payments start out lower than on a standard repayment plan. But they increase by 7% every two years. This allows you to pay off your loans faster and faster.

The last option is private financing. You go through a private lender to refinance your student loans at the lowest interest rate possible. This works for both private and federal loans. However, if you use this solution for federal loans, you convert the debt to private. That means you’re no longer eligible for federal relief.

In most cases, you want to keep federal debt federal, in case your financial situation changes. The good news is that these federal repayment plans don’t have prepayment penalties. In other words, you can make extra payments or larger monthly payments without incurring penalties.

How to get out of student loan debt if you’re struggling to make payments

“If you’re having trouble keeping up with your payments, then your primary concern is your credit,” Lewis-Parks explains. “Student loan servicers report missed payments to the credit bureaus. Each payment that’s more than 30 days late appears as a negative item on your credit report. Those late payments remain on your credit for seven years. So, in this situation, your primary focus should be on finding a solution that makes it easier to keep up.”

The good news is that there are a wide range of different programs designed for borrowers facing financial hardship:

  1. Income-based repayment
  2. Income-contingent repayment
  3. Income-sensitive repayment
  4. Pay as You Earn (and Revised Pay as You Earn)
  5. Public Service Loan Forgiveness

“The repayment plans tie your monthly payments to your income and family size,” Lewis-Park says. “That makes it easier to afford repayment of your loans. The payments are usually capped between 10-20% of the income you take home. In some cases, of extreme hardship, you could pay nothing without getting penalized.”

Lewis-Parks encourages any borrower that’s having problems to talk to a student loan resolutions specialist. “They can help you identify solutions for student loan problems, the same way a credit counselor does for credit card debt.”

Want to know more about student loan debt relief? Visit Consolidated Credit’s guide to Student Loan Debt Consolidation!

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