75% of Those With Student Loans Are Paying Interest Only (or Not at All)

via CNBC:

  • Currently, fewer than a quarter of student loan borrowers are repaying their principal, or what they originally took out, according to recent remarks made by Education Secretary Betsy DeVos at a conference on financial aid.
  • That’s because their monthly payments are just going to the interest accumulating on their debt, or they’re not paying anything right now.
  • In the meantime, their debt is likely growing.

 

How much people borrow to attend college can become just a small share of what they wind up owing.

Currently, fewer than a quarter of student loan borrowers are repaying their principal, or the amount they originally took out, according to recent remarks made by Education Secretary Betsy DeVos at a conference on financial aid.

That’s because their monthly payments are just going to the interest accumulating on their debt or they’re not paying anything right now.

In the meantime, their debt is likely growing.

 

For example, law school graduate Rick Tallini borrowed around $55,000 in the 1990s. He’s since struggled to find employment and pay the bills, and today his student loan balance has ballooned to well over $300,000.

Story like his are common, said Persis Yu, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “Loans doubling, tripling, quadrupling; it really does happen all the time,” Yu said.

CNBC worked with student loan expert Mark Kantrowitz to explain some of the common reasons people see their balances climb.

Let’s say you started with $50,000 in federal, unsubsidized student loans, with a 5 percent interest rate.

 

Interest will accrue on your debt while you’re in school. It will continue to do so during your grace period, the six months after graduation during which borrowers are typically not required to make payments.

When your bills start rolling in, your debt has already increased by $6,458. So even though you borrowed $50,000, when your payments start you owe $56,458.

… How to avoid it:

Students can keep interest at bay by making at least interest-only payments while they’re in school and during their grace period, said Teddy Nykiel, a student loan expert at personal finance website NerdWallet.

You will only need to pay the interest on any private or unsubsidized loans during these periods, Kantrowitz said. The government pays the interest on subsidized loans while you’re in school and during your grace period.

Reach out to your loan servicer and ask for assistance making your proactive payments. Kantrowitz recommends finding out if your lender offers any discounts on your interest rate if you make payments while you’re in school, as some, like Sallie Mae, do.

If you don’t land a job …

Not everyone finds work right out of school, and some people are eligible to postpone their student loan payments. One way to do that is through an “economic hardship deferment.” If you requested the maximum amount of time under that option, you could put off your payments for three years.

However, doing so will slap another $8,469 onto your debt. Your balance is now $64,927.

 

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