Gain Control of Your Student Loan Payments With These 3 Questions

Financing your education is no small task, so it’s no surprise many Americans fund their higher education through student loans. In 2016, over 42 million Americans had student loan debt, with the average debt a whopping $32,731 according to the Federal Reserve.

If your loan is backed by the
Department of Education,
you may have different
repayment options than if
you received your loan
through a private lender.

The best way to fund such an important endeavor is to prepare before you apply. If you are currently applying to college, free resources like FINRA’s College Savings Calculator and the Consumer Financial Protection Bureau’s (CFTC) Paying for College can help you get a handle on where you stand with your current college savings and how much college actually may cost you.

But if your college days are behind you, don’t fret. There are numerous repayment options available. Whether you have begun paying off your student loans—or are about to start doing so—ask yourself these three questions.

1. What kind of loans do I hold?

Most college loans come in two categories: federal and non-federal (private) loans. If your loan is backed by the Department of Education (typically through a Direct Loan, Stafford, PLUS or Perkins), you may have different repayment options than if you received your loan through a traditional bank, credit union or other private lender.

If you have federal loans, you can find information on your repayment options on the Department of Education’s website. If your loans are private, you will have to contact your student loan servicer for more information on the options available to you.

These days, many loan service providers offer the opportunity to consolidate similar types of loans into a single loan. For instance, if you have several federal loans with different providers, you can consolidate your loans so that repay only one company. Sometimes consolidation may be an opportunity to get a lower interest rate on your federal or private loans. But there can be other advantages and disadvantages, so contact your provider to explore your options.

2. Am I able to make my current monthly payments?

The percentage of monthly income you put towards student loan payments is a personal decision. While general guidelines suggest keeping payments to no more than 10 to 12 percent of monthly income, you should be mindful of balancing existing debt with planning for future financial needs (retirement, a home, etc.).

However, if you cannot make your current minimum payment, here are a few things you can do to avoid falling behind:

  • Contact your lender: If you are struggling to make monthly payments, the first thing you should do is contact your loan servicer. They will often be able to provide the best guidance for your specific situation and can walk you through your options.
  • Restructure your monthly payments: Regardless of whether your loan is federal or private, options most likely exist to change your payment structure to fit your financial situation. Federal borrowers can apply for income-based repayment plans like Pay As You Earn (PAYE) or Income-Based Repayment (IBR). Private borrowers often have fewer options than federal borrowers and the options available can vary significantly from lender to lender. You will have to contact your lending institution to learn whether you can adjust the terms of your loan.
  • Minimize interest charges and long-term damage: Once you have set up a monthly plan that works, consider taking additional steps like setting up auto pay, consolidating loans and paying down your most expensive debt first (to the extent your budget allows). For example, setting up auto pay can reduce your interest rate by 0.25 percent for some federal loans. It’s an easy step that can save you a lot of money over time.

3. Are my loans facing deferment, forbearance or default?

Missing loan payments—no matter the length of time—can damage your credit and lead to a higher balance through a longer accumulation of (potentially higher) interest charges. Applying for deferment or forbearance can alleviate short-term pressure under the right circumstances. But you should do all you can to avoid kicking your payments down the road. Depending on your specific loan, there are likely ways to apply for income-based repayment options (more on this topic below).

If you have missed payments and your loan is facing default, there are a few things to keep in mind while communicating with debt collectors:

  • You have rights: Debt collection can be stressful. It is easy to feel pressured, helpless and otherwise lacking control of your financial decisions. However, there are protections guaranteed to you no matter the size of your outstanding loan and limits to what debt collectors can do. For example, you have the right to ask for more information, verify the validity of the debt collector’s request, and seek legal representation. To learn more about your rights, check out When the Debt Collector Comes Calling: 5 Things You Need To Know About Your Rights and check out these strategies from the CFPB.
  • You can often negotiate: Even though a debt collector may say you need to repay a loan in full, you can often request a payment plan that is more manageable for your current income or potentially agree to repay a smaller portion of the loan than the full amount.
  • You have options: Between programs like federal loan rehabilitation, loan forgiveness and consolidation and non-federal loan payment options, you have pathways to repair the damage done by a defaulted loan. It may take time, but if you understand your rights and communicate with the collector, you can regain firmer financial footing. Watch out, though. Some debt repayment companies will try to charge you for programs that should be free. Read this for more information.
  • Don’t disappear: As hard as it may be, it’s better to confront your debt problem than to run away from it, because this problem won’t go away.

Thinking about your student loan payments is probably the last thing on your to-do list around the holidays. But asking these questions and following these steps can help put you on a path towards financial security and peace of mind.

For more information on student loans, be sure to check out Congrats, Grads! Now, What About Your Student Debt? or What You Need to Know About Student Loan Forgiveness. Subscribe to FINRA's The Alert Investor newsletter for more information about saving and investing.