New graduates face the responsibility of starting to repay the student loans they have.
In this segment of Industry Focus: Financials, Motley Fool analyst Gaby Lapera talks with Dan Caplinger, a Motley Fool contributor, about the basics of student loans. New grads have to figure out how to repay their loans, but there are also opportunities to get help with payment schedules or even earn debt forgiveness in certain cases.
A full transcript follows the video.
This video was recorded on June 19, 2017.
Gaby Lapera: We're going to hit two topics today, because today's episode is dedicated to the class of 2017, who graduated recently. Congratulations! I'm sure that that first cold shower of life outside of school has already hit you, and we want to help. Let's talk a little bit about your student loans, and then let's talk about your first job. Dan, student loans, something that you have to look forward to with your children, probably.
Dan Caplinger: Yeah, probably. I have a few years left on that one. My daughter is graduating from elementary school this year -- a momentous occasion, but we still have some time to save up on those college funds. But, congratulations to those of you who have finished up with college, but unfortunately, it's time to pay the piper, because often, what happens with student loans is, many will give you a deferment while you're still in school where you don't have to make payments back. But then, pretty soon after you graduate, they're coming out with hand out waiting for you to start making your first monthly payments. So, it's something you really need to keep track of and understand what your obligations are going to be going forward.
Lapera: Definitely. I think one of the most important things to note is that you absolutely need to pay these loans. Sometimes people get really overwhelmed by them, and they're like, "I'm not going to think about it, I'm not going to pay it," but this is a really bad idea with these loans because the interest just keeps accruing, and unlike other types of debt, these cannot be discharged in bankruptcy. So even if you declare bankruptcy, these loans are still there to haunt you.
Caplinger: That's right. Also, on that same note, if you try to just ignore things, you can expect things like late payment fees, failure to pay fees, to add up, because the financial institutions that make these loans usually have those provisions in the fine print. So, the best thing to do if you find yourself in a jam is be upfront about it. Talk to the people who are servicing your loans. You are not alone, you are not the only person who's having trouble, and there's actually some pretty helpful things that lenders can do to try to help and make it easier for you to be current, to meet your obligations, to pay things off, but not get yourself in trouble.
Lapera: Yeah. As Dan said, the most important thing is to call your lenders and try to figure something out. I know it might seem like they're monsters, but there are people on the other side of the phone, and it's in their best interest that you be able to pay these loans, as opposed to just completely default on them. So, they will try and help you. Dan, do you want to go over a couple of the things that they might be able to do for you?
Caplinger: A couple of things that they can do are, in some cases, they can arrange for and additional emergency deferment, where interest will continue to accrue, but you may get a few months off where you don't have to make payments, might not have to make full payments, they might give you a discount or something like that. The other thing that folks can do is try to work with you on what's called a consolidation loan, and that basically takes all of your student loans, combines them into one package, so you have one payment to make. Then, it can sometimes change the repayment terms, extending the life of the loan for a longer period of time. That obviously means you're going to pay more in interest charges over the lifetime of the loan, but what it does is reduce the monthly payment. And sometimes, that's the most important thing, especially for folks just coming out of school, who might not have a job or have the job that you eventually want. It's a good stopgap in order to keep you moving forward and not get in trouble.
Lapera: Yeah. And with the consolidation, something you can look for is, sometimes the rates on student loans are kind of high. Sometimes, with consolidation, you can get the interest rates lower, and that will obviously help also lower your monthly payment, and your payments over time.
Caplinger: That's right. The other thing that you should look into is, there are loan forgiveness programs for certain types of loans. Those are the sort of things, you may have heard about them doing certain types of public service, if you do it for a long enough period of time after you graduate, then you can get a portion -- or even some of the provisions forgive all of your loan indebtedness -- after you work for a certain number of years. So, take a look at that and see if it applies to your chosen profession, and the kind of job you might be interested in doing.
Lapera: Generally, the jobs that are included in there are government work, there's teacher loan forgiveness, doctor loan forgiveness in certain states, and nurses' loan forgiveness in almost every state and federally as well. There's also some income-based repayment plans. That's if your total student loan debt creates such a financial hardship that it's going to be basically impossible for you to pay, so they lower the amount of payments that you have to make, it's capped at a certain percentage of your income, and after paying off those loans for 20-25 years -- so, this isn't exactly a great deal -- sometimes they will forgive the entirety of your debt. So, that's also something to look into. I hope you're not in that position.
Caplinger: This space is evolving quickly that those sorts of solutions make people start looking into ways to make things work on a long-term basis, and stuff like that income-based repayment is relatively new, but it's something that people are really taking into account, the fact that student loan debt is a big problem going forward, and we need to do something to make it more manageable.
Lapera: Definitely. Just a reminder that sometimes when you have student loan forgiveness, when those loans are forgiven, they are counted as income for your taxes that year, so you might be hit with a big tax bill, so definitely look into that before you get all of your loan forgiven all at once, and suddenly it looks like you made $100,000 that year. And, before I forget, there's one other thing. You can get your loans deferred if you talk to your lenders, for a couple months. The other way to get loan deferments is if you go on to grad school, if you're in the Peace Corps, if you're active military, or if you're in a rehab facility of some kind -- it wasn't exactly 100% clear to me what kind of rehab facility, but it looks like they give you a deferment for the time that you are an inpatient in that type of facility. So, something to keep in mind, if you're not working or if you're in any of those other fields.
Caplinger: Again, check with your lender if you're uncertain about a situation that you're in. They'll be surprisingly helpful in working with you, in most cases.