Over the next few weeks thousands of students will graduate from colleges and universities around the nation. They’ll throw their caps in the air with elation, but as their professional lives begin, so does the clock for repaying student loans.
Jenna Doiron knows this pressure well. She graduated in May from Belmont University in Nashville with a degree in corporate communications. Doiron took out two loans (one federal, one private) totaling $31,000.
“When I graduated I got an email from my federal loan provider saying that I couldn’t graduate unless I took this online quiz about my loan,” she told Yahoo Finance. “It helped me understand how repayment works. They probably make graduates do it because a lot of people default on student loans.”
Currently, 44 million borrowers owe $1.3 trillion in student loan debt in the US, and the average student in last year’s graduating class owed $31,172.
According to a report from the Federal Reserve Bank of New York, household debt has surpassed the previous peak of $12.7 trillion seen during the Great Recession. Mortgage debt makes up the largest portion of this tally (about 67%), but that number is actually down from 73% in 2007. One the rise, however, is student loan debt which accounts for 10% of household debt. That’s up from 3% in 2003.
One of the particularly acute problems with growing student loan debt now is that borrowers are failing to make regular payments. At the beginning of 2017, the delinquency rate (when payments are 90 or more days late) for student loans was nearly 10%. For comparison, the delinquency rate on credit cards is 5.9%. While high, Theodore Cangero, data scientist at the American Institute for Economic Research (AIER) suggests that the number of people not paying back their loans is worse than meets the eye.
“The delinquency rate is likely understated because almost half of student loans are in deferment or grace period,” Cangero told Yahoo Finance. “If you factor in all of the loans, that number would likely be higher.” (Deferment allows borrowers to temporarily stop making loan payments.)
Why aren’t people paying back loans
It’s no secret that the period after college can be filled not only with excitement about entering a new phase of adulthood, but also with stress and uncertainty. Federal student loans give students a six-month grace period before they have to start paying the money back, but that’s often not enough time.
“My first loan payment of $388 is due in November, which is stressful,” says Doiron who lives in Nashville. “It feels far away, but I know it’s not.”
For many recent grads, the biggest obstacle is finding a high paying job – or a job, period. The Federal Reserve reports that the number of underemployed recent graduates has continued to rise since the 2001 recession.
“Private debt tends to become a problem after an economic shock such as a recession,” says Cangero. “People couldn’t work, so they went back to school and took on this debt, and now they are trying to get back in the labor market and paying back student loan debt falls to the wayside.”
Being “underemployed” means taking a job that does not require a bachelor’s degree; currently, about 33% of college graduates fall into this category. For recent graduates, underemployment is more common, reaching 45% between 2009 and 2013.
Doiron is also currently underemployed, and will make money this summer by babysitting for two local families. She hopes to use her communications degree in the wedding industry, and has been applying for jobs. Still, finding employment is proving to be more difficult than she expected. “Even the entry-level job listings say you need a certain level of experience,” she said. “I’ll take anything at this point because I need to break into the industry somehow.”
Ways to prevent default
According to the Federal Reserve, the average monthly student loan payment for borrowers between ages 20 and 30 is $351. Kat Tretina is a repayment expert at Student Loan Hero, a website that helps borrowers find and evaluate lenders. She says many recent grads struggle to repay loans on their starting salaries.
“Loan servicers aren’t always proactive and telling people their options when they start falling behind,” she tells Yahoo Finance. “That can cause people to fall behind that shouldn’t.”
Here are some options to avoid loan default:
If you have a federal loan, you can lower your monthly payment by adopting an income-driven repayment plan. This option let you set affordable monthly payments based on your income and family size. There are a handful of different options available, which will generally drop your monthly payment to between 10% and 20% of your discretionary income. To apply, visit the student aid page on Department of Education website.
Deferment or forbearance
If you’re really struggling to make your monthly student loan payment, it might be time to apply for a deferment or forbearance to prevent default. Both of these options will give you a temporary break from making payments. If you defer your loans, you postpone payment and interest does not accrue on your direct subsidized loans, subsidized federal Stafford Loans, and Federal Perkins Loans. Interest will continue to accrue on unsubsidized and Direct Plus loans.
If you apply for a forbearance, your monthly loan payment is suspended or reduced for a specific amount of time. Interest will continue to accrue – and will ultimately increase the amount you owe.
Contact your loan provider to check if you’re eligible for a deferment or forbearance.
Refinancing is another way to make your student loan payments more manageable. “You take on a new loan with a bank, but it has different terms,” says Tretina. “This allows you the option to extend your repayment terms and get a lower monthly payment and interest rate.”
It should be noted that extending the repayment term (from 10 to 25 years) will lower your monthly payments, and give you more money to spend on current needs. But you’ll end up paying more money over the life of the loan.
Finding the right bank can be hard, so it’s important to do your research. Student Loan Hero has a list of suggested lenders, and from there, you’ll need to work with the bank to refinance. Banks will look at your credit score, income, and college degree to determine if you’re a good candidate for refinancing.
If approved, these loans typically have variable interest rates from 2% to 7%, and can help you lower your monthly payment by hundreds of dollars.
Brittany is a reporter at Yahoo Finance.