Thanks to social media keeping track of our past activities, I was recently reminded that this summer marks the 5th anniversary of getting my bachelor's degree. I would love to tell you that all of my student loans are paid off, but I'm not quite there yet. Instead, I will share the 5 things that I have learned about student loans since graduating.
1. Private student loans could be transferred to your cosigner if you die
Some student loans will continue to live, even in the event of your death. The life of your loans will vary by their type, and if you had a cosigner. Most Federal loans (including Direct Subsidized, Direct Unsubsidized, Direct Consolidation, and Federal Perkins Loans) don't require a cosigner, and if you were to pass away while these still had a balance, your family would be able to get them discharged by submitting proof of death to the loan servicer.
Private loans, which typically require a cosigner, are another story. This will vary depending on the lender, so it's important to check your loan contract regarding the death and disability discharge to see if it is discharged in the event of the borrower's death. Often, cosigners are left with the responsibility of paying off your loan if you die, and this is a reason why many people make these loans a priority to pay off first.
2. The difference between fixed and variable rates
When you have a fixed interest rate, it means your interest will be the same throughout the entire life of your loan (unless you refinance), and you don't have to worry about it increasing.
When you have a variable interest rate, it can start at a lower rate, but can change as often as month-to-month, and typically in the higher direction. Your variable rate will be determined by the London Interbank Offered Rate, also known as LIBOR.
I learned the difference between the two the hard way, after watching my Sallie Mae variable student loan interest increase by 0.25% what seemed like every month during the final year of paying it off. Nothing is more frustrating than seeing your interest rate rise, as you throw all of the money you can at your debt. When I took out my loan initially, in 2013, the interest was at 7%. By the time I paid it off in 2018, my interest was over 10%. I managed to pay this one off a year early, and I don't like to think about what my interest rate would have been if I hadn't.
There is often a cap with variable rates, but some are as high as 25%. If you have a variable rate on a student loan, make sure you look into your interest rate and see what the cap is. Even though it's a frustrating experience, having a variable rate can motivate you to get rid of your loan even quicker.
3. Paying off a student loan can temporarily lower your credit score
If you're like me, your student loans might be one of the biggest influencers of your credit score, because they are typically one of the first accounts opened. When I paid off my first student loan, I was expecting a bump in my score, because paying off a loan, especially paying one off a year early, surely is a thing that shows credit-worthiness, right?!
If you keep regular tabs on your score through a source like Credit Karma (one that doesn't hit you with hard inquiries, no matter how often you check) you might expect a little congratulatory message when you pay off your debt. But, when you pay off a student loan- you instead are greeted with an account closure. Closing an account, especially if it is one of your oldest accounts, will lower your total number of accounts (something that impacts your score) and it will also lower your average age of credit history (another big factor in determining your score).
Don't let this discourage you from paying your loans off though, while it will vary depending on how many other accounts you have, and the average age of them, it shouldn't be too big of a hit, and it's certainly one that your score will recover from. Personally, paying off and closing one of my oldest accounts dropped my score by 5 points, and it took 5 months to bounce back and recover those 5 points.
4. Student loan debt is not as easily forgiven by bankruptcy
I had previously thought that student loan debt was the only debt not erased when you file for bankruptcy. Not that I was looking to do that, it's just one of those random "facts" you pick up and add to the list of 'why student loans are evil'. It turns out though, that both private and federal student loans can be discharged when you file for bankruptcy, it just takes a little more work.
If you are looking to get rid of your student loans through bankruptcy, you will need to file an extra lawsuit, where you will have to be able to prove that your loan repayment causes undue hardship. It's important to note that this process has the potential to be very expensive, and any judge would probably like to see some effort of paying the loans prior, or an effort to earn more in order to pay the loans. This is designed to be a last resort, and a professional with experience on student loans and bankruptcy should be consulted.
5. Playing the victim is not going to get rid of your loans
If you want to talk about the ridiculous amount of student debt the United States has, how it is unfair to load so many young adults that probably don't know any better with such high debt, and all of the negative impacts this has for the economy... I'm right there with you. But that doesn't mean you shouldn't pay your loans back.
When we let ourselves be the victim, and push our student loans out of sight and out of mind, the only thing we're doing is acquiring more interest. When you sigh and say to yourself "I'm going to be paying these loans off forever..." you probably are. But you don't have to. By taking initiative, making a budget, and setting a debt repayment plan for yourself, paying off your loans can turn into an empowering thing.
If you need someone to motivate you to tackle your loans or discuss strategy with, please, feel free to reach out! You can email me at firstname.lastname@example.org.