You’ve finally reached the point where you've decided you’re tired of money being at the center of every one of your life decisions. I feel you. For years I had this accumulating student loan and credit card debt that controlled my life.
Once your student loans hit that default mark you are in a deep financial rut. Going into default creates serious consequences to your ability to thrive in life, affecting things like your ability to get a new car, new credit card, or new apartment.
Learning how to get out of debt is vital to your financial and emotional success.
One of the most difficult parts of the debt-free journey is figuring out the best approach to tackling your debt. Should I consolidate? Should I refinance?
Let me help you out:
WHAT IT MEANS TO DEFAULT ON STUDENT LOANS
Your loan(s) become “delinquent” with your first missed payment. When you miss too many consecutive payments, your loan then goes into default.
Federal and private lenders have different marks of default. Most federal loans will consider you to be in default after nine months of missed payments. Most private lenders will consider you to be in default just after three months of missed payments.
WHAT HAPPENS AFTER YOU GO INTO DEFAULT
Whether you have federal or private loans, defaulting on your debt will leave you googling the “highest paying strip clubs in my area.” Here’s what you can expect if you start missing too many payments (if you haven’t already).
Private Loans
Once you hit default you will owe the full balance of your debt. If you graduated May 2015 and fell behind in the first few months, that means you could owe $12,000+ by August 2015.
Phone call harassments
Your private lender can send your defaulted debt to collections. If that happens, expect daily calls, from several different numbers asking for their money. Your lender could be even more spiteful and add charges to those collections, increasing the amount you owe.
**Life hack: you do not have to answer their calls. You do not have to make a payment plan with them if you are not ready.
Low credit score
Your private lender can report your debt to credit bureaus, which negatively affects your credit score.
Court appearance
If you still can’t make the payments, your private lender can and will take you to court to get their money. They will take everything you have. If you don’t have anything (like a house or car) they will take their money straight out of your paycheck.
Hurt relationships
Most young borrowers have a cosigner for their student loans. Your cosigner is responsible for your missed payments. They will be responsible for the full balance as well which could strain your relationship with them (especially if it is family).
FEDERAL LOANS
Like private loans, you will experience the same things, but can be even more severe. When in default with federal loans you can lose out on income driven repayment plan option benefits. They will also take you to court taking money from your paycheck and take money from your tax refund!
HOW TO PREVENT DEFAULTING
If you’re reading this, its too late (Drake reference). You have probably already tried to work your way into student loan forgiveness, IDR, and forbearance or deferment but still defaulted on your loans . Right now, you understand how important it is to get out of debt ASAP.
HOW TO PAY OFF STUDENT LOANS FAST
There are a few options to getting out of default including consolidation or refinancing your debt and taking out a personal loan. But for the young adult with student loan debt and low income, I feel the only best option is to pay off your balance in full.
Let me break it down:
There are a lot of factors that go into picking the best one. Weigh the pros and cons of each option.
There are two types of student loan consolidation: federal and private. Private consolidation is also typically referred to as refinancing. People tend to use these terms for these processes interchangeably but consolidation and refinancing are very different. Here’s how:
CONSOLIDATION
Federal student loan consolidation combines all your federal loans into a single federal loan through the Department of Education. With this you can lower your monthly payments but not your interest rate.
This is an option for someone with a steady stream of income and a high credit score.
PRO - monthly payment can possibly be lowered
CON - your interest rate will remain the same (if not increase), you will be out on a 10+ year repayment plan (neither of which helps you pay off your student loans faster)
REFINANCE
Student loan refinancing, a.k.a private student loan consolidation can be done with your private lender. If eligible, you can possibly save money by having your interest rate lowered.
PRO - interest rate can possibly be lowered
CON - your monthly payment can remain the same (if not increase), you will be out on a 10+ year repayment plan (neither of which helps you pay off your student loans faster)
PAY OFF BALANCE IN FULL
It sounds impossible but it's not at all. I paid off $22,000 in 7 months on a $37,500 annual salary (read that again). Paying off your balance in full simply requires creating a strategic plan tailored to your lifestyle and income level to pay off each debt one at a time and quickly.