As another round of college students graduate, they’ll also start repaying their student loans.
Federally-backed student loans offer many repayment options, and the choices often mean a difference in thousands of dollars in interest and decades of payments.
Here are nine student loan facts to help every college graduate make informed decisions on their path to pay off debt.
1. Interest can accrue before repayment
One confusing part of student loans is that interest can add up in the background, even before payments are due.
A student who borrowed $5,000 in unsubsidized student loans his freshman year and deferred payments for four years will find about $1,500 in interest added over this period. This doesn’t account for loans taken in subsequent years or interest that continues to accrue during repayment, either.
Students and grads can apply for deferment and forbearance of student loans, which means payments are temporarily stopped for special circumstances. But interest keeps accruing on unsubsidized loans during deferment periods and for all loans in forbearance, so don’t be fooled.
2. Can’t easily use bankruptcy for student loans
While most all other types of debt are able to be discharged in bankruptcy, it’s more difficult for student loans.
Student loan holders must prove “undue hardship” because of the debt, which isn’t as simple as it sounds. According to StudentLoanBorrowerAssistance.org, the debtor must demonstrate they can’t maintain a minimal standard of living and show that this situation will continue for the repayment period.
Even for those who successfully make their case, bankruptcy has serious consequences, too. Bankruptcy remains part of your credit history for up to 10 years and can drastically lower your credit score in the meantime.
3. Deferment won’t affect your credit score
While putting off paying your loans with deferment and forbearance can tack on interest, these generally won’t hurt your credit score. Student loans in deferment and forbearance are considered current, making them better options than skipping payments.
4. Late payments and defaults will hurt your credit
Despite the flexibility of student loans, they are reported to credit bureaus. Messing up can spell trouble for your credit score.
Late or missed payments hurt your credit score, especially when you’re more than 90 days behind. Paying less than the minimum can damage credit, too, since you’ll likely be considered delinquent.
If you stop paying altogether, you could end up in default. At this point, your lender could take more serious action to get you to repay, like taking you to court. There are many consequences of defaulting, and the court can allow your wages is be garnished to repay the loan.
5. Private loans are less flexible than federal loans
Private student loans differ from federal loans in many ways, including with how they’re repaid.
Private loans often don’t guarantee access to alternative payment plans, deferment, and other benefits. Plus, you may pay more interest and be forced to make payments while still in school.
Check your options for repaying private loans, and consider paying these off before federal loans to avoid these increased hassles and costs.
6. Choosing alternate repayment options is a trade-off
While federal loan holders are automatically eligible for many repayment options, choosing one is often a trade-off. The primary benefit of these options is reducing payment amounts by changing the term of the loans.
If you’re trying to pay off student loans faster, most repayment options lengthen the term and increase the cost of repayment. Some repayment options extend the original 10-year repayment term out to 25 years. During this time, thousands more in interest can be tacked on.
Before choosing alternate repayment options, make sure you understand the implications for the cost of your loans.
7. Consolidation doesn’t save money
Consolidation of federal student loans typically doesn’t save money and may actually cost you more. The purpose of consolidation is to make paying back loans easier so you don’t have to deal with multiple bills each month.
Interest rates are averaged on a weighted scale according to balances. When this happens, you lose the ability to target high-interest loans first when accelerating repayment. You may also lose benefits from the original loans, like interest rate discounts and principal rebates.
8. There are ways to get loans forgiven
Even though bankruptcy isn’t always an option, there are other ways to get your student loans forgiven in special cases.
Teachers and those working in certain public service jobs may be able to have part of their loans forgiven after a certain number of years or payments made.
Those with a permanent disability may be able to have student loans discharged, too.
9. Despite debt, a degree is often a good bet
Despite all the bad rap about student loan debt and the struggle of repayment, college grads earn much more than those without a degree.
According to a report by Fastweb, a bachelor’s degree is worth $1.2 million more than a high school diploma. Advanced degrees push the advantage even higher, with professional degree-holders earning $2.9 million more than those with just a high school education.
The numbers point to significant increased earnings throughout a career, meaning the struggle to pay back the debt is often worth it.