Here’s what you need to know-
A new report says that about half of student loan borrowers have a higher student loan balance after 5 years.
Student Loan Repayment
Imagine this common scenario: you borrow student loans. You start to pay off your student loans. You keep paying off your student loans every month. Five years go by. Now, here’s the uncommon part. After 5 years, your student loan balance is higher than when you started. Literally, your student loan balance has not declined. Zero. Zilch. Nothing.
Suddenly, with the power of compound interest, you owe more money than you borrowed – and then some. This may sound unbelievable, but this is what happens to 49% of federal student loan borrowers, according to a new report from Moody’s. Moody says that only 51% of federal student loan borrowers who started student loan repayment in 2011-2012 had made any progress in reducing the balance on their student loans after five years. This includes borrowers from public, private, and for-profit colleges.
Moody found that slowing student loan repayment is a major driver in the growth of student loan debt. Today, the latest student loan debt statistics show that more than 44 million borrowers collectively owe $1.6 trillion of student loan debt. According to Make Lemonade, student loan debt is now the second-highest form of consumer debt after mortgages. This new data is important. Historically, rising tuition costs and higher enrollment were the leading drivers of student loan debt. Now, slowing student loan repayment may be a major contributor to increased student loan debt. Moody says that despite popular belief, student loan originations and enrollment have declined in recent years, while tuition has stabilized relative to the family income.
Why Are Student Loan Balances Increasing?
According to Moody’s, there are two main reasons that student loan balances are increasing:
- Income-driven repayment plans
- Longer student loan repayment terms
Income-driven repayment plans are available to federal student loan borrowers and base your student loan payments on your discretionary income, family size, and state of residence. There are four main income-driven repayment plans: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). Income-driven repayment plans can reduce your monthly payment to as low as $0.
The problem with income-driven repayment is they can provide short-term financial relief but are potentially more expensive in the long term. Too many borrowers jump into income-driven repayment terms for the “promise” of lower payments, but those lower payments come at a cost because interest still accrues on your student loans. There is a clear benefit of income-driven repayment: if you make on-time payments each month for 20 or 25 years, you can receive student loan forgiveness on the remaining balance of your student loans. However, you’ll owe income taxes on the amount of student loan debt forgiven.
Longer Student Loan Repayment Terms
The standard student loan repayment term for federal student loans is 10 years. A longer student loan repayment term can lower your monthly payment and save money in the short term. Many borrowers choose a longer repayment term because they can’t afford their monthly payments or they want financial relief for other financial priorities. However, even if you have a lower monthly payment, interest accrues each month and you can owe higher total interest on your student loans compared to a standard repayment plan. Therefore, it’s crucial to understand the ramifications of choosing a longer student loan repayment term.
Potential Next Steps
Student loan forgiveness and income-driven repayment are two potential options to pay off student loans. Here are two others:
Potential Next Steps
Student loan forgiveness and income-driven repayment are two potential options to pay off student loans.
Student loan refinancing rates have dropped significantly to 1.89%. Student loan refinancing lowers your interest rate, saves you money, and helps you pay off student loans faster. With student loan refinancing, you can refinance federal student loans, private student loans, or both.
Student loan consolidation won’t lower your interest rate, but it can help you organize your federal student loans into a single student loan with one monthly payment.