How College Students Get Into Loan Debt

College loans are considered a relatively small part of the financial loan sector, which loans out trillions in credit card and commercial mortgage loans. But for individuals, college loans are often the second-largest expense of their lives, right behind mortgages. Unfortunately, this debt comes at a very challenging time of an individual's financial life, which is why many people struggle with their college loans and have trouble paying them off upon graduation.

Unmanageable Debt

First, college loans can simply be difficult to pay for. Mortgages and auto loans come in many different packages with different payment structures and deals to make beginning payments easier to make. College loans have far fewer options. While subsidized Stafford loans can be much easier to pay off than other options through their low rates and delayed payments, few students can get by on only subsidized loans, especially for the schools they want to attend. Unsubsidized loans not only create additional debt, but also have worse terms that require more payments.

Expense Problems

College students, upon graduation, have both living expenses and loans to take care of. Unfortunately, living expenses are not always something college graduates have a lot of experience dealing with. Many have basic living and food costs managed by the college as part of their tuition, or receive money from their parents to manage extra costs. But upon graduation students encounter rent, utility, food and furniture costs that in many cases they are not ready for. This can put a strain on budgets and make debt even more difficult to pay off.

Income Problems

Income problems are also an enormous problem for college students. Many students find that the jobs they qualify for, typically entry-level positions with minimal pay, do not create enough income to pay off college debts and leave room for other necessary expenses. Some college graduates hold out for a higher salary, but this delays income entirely and increases the severity of the problem.

Refinancing

Refinancing is a common solution for many kinds of college debt. Essentially, refinancing replaces one debt with another. There are several government programs designed to help graduates through this process. The primary benefit to this type of refinance is that it spreads out payments and often provides a lower interest rate, making the debt much easier for struggling students to pay off.

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Fast Ways to Pay Off a Mortgage

Paying off mortgages quickly can net higher profits on the sale of a home later. Prepaying a mortgage builds equity much faster. While banks and lenders offer a handful of options to pay off a mortgage quicker, there are many options available to achieve the same result that many people might not know about. This means money in your pocket down the road.

Prepay in the First Few Years

During the first five to seven years of a mortgage, the interest payments will be the largest driving factor in your monthly payment. Adding money onto the principal balance during this time will reduce interest fees over the duration of the loan. Making just one extra mortgage principal payment per year will reduce a 30-year mortgage to a 21-year mortgage.

This prepayment does not have to come in the form of a large lump sum. You could pay the single extra principal payment over an entire year, changing your monthly payment by just a few dollars per month.

Mark Your Extra Payment

Every time you make an adjustment to your mortgage payment, it's important to validate and verify that the extra money was applied directly to the principal on the loan and not divvied up between principal and interest. Marking your extra payments by using a second check and recording that information will help ensure that payments are not mismanaged. Regardless, it is still wise to call the lender and verify that your payment was applied correctly.

Yearly Lump Sum

Another good way of paying off or paying down a mortgage would be to pay an annual lump sum payment and have it applied directly to your principal balance. This will take a large bite out of the principal. However, some mortgages have stipulations on how often you can pay extra per year, so it's wise to know their limits.

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How to Clear My Credit Record

Your credit report is a reflection of your loan and payment history. Typically, it reflects the past seven years of your debt and payment behaviors. If you've had trouble paying off debts, a negative credit report could block a loan approval or prevent you from leasing a car. Bad credit can be turned around, though, by making payment or settlement arrangements with your creditors and disputing negative items that appear on your report.

Instructions

1

Contact each of the major credit-reporting agencies online and request your free credit report. Each credit bureau is legally obligated to make available to each American a copy of his credit report once a year without charge. The credit bureaus are Experian, TransUnion, and Equifax.

2

Write to each credit bureau and the creditor that made the report to dispute any negative items that you do not believe belong on your report. Each creditor should have a mailing address listed on your credit report. Send them a letter stating why an item is invalid. Also, send copies of any documentation that supports your claim. Copy the letter to each of the credit bureaus and request that the item be removed from your record.

3

Send dispute letters until any negative, invalid items are removed. More than one attempt is not unusual.

4

Circle the debts that you do owe and then call each creditor to set up a payment plan.

5

Negotiate with creditors to take an item completely off your credit report, rather than listing it as paid-in-full or settled, which is more beneficial to your credit score. Obtain a written statement of the creditor's intentions before you send any payments. You can use this if you have to dispute the charge again later. Debts are less likely to be paid the older they get, so your creditor likely will be motivated to make an arrangement to collect less money. You should see positive results if you explain that you want to settle the debt but cannot afford the entire amount.

6

Negotiate for "paid-in-full" even if you're making a settlement. Accounts marked as paid-in-full look better to future lenders than those marked as "settled." Get a letter from the creditor promising to mark your charge as "paid-in-full" so you can have documentation to dispute the charge if it is not changed.

7

Reach settlement agreements if you cannot pay the full amount. Creditors have a vested interest in getting some money out of you; they'll be willing to work with you. You can have as much as 50 percent of your debt removed if you're willing to accept a settlement. Be sure to get a letter from the creditor that serves as written proof of the creditor's promises.

8

Pay off your debts and then check your credit report again. Each time you dispute a charge on your credit report, you're entitled to a new free copy. Otherwise, a new copy of your credit report will cost about $10. Be sure the companies to which you made payments actually kept their promises. If they didn't, use the written proof they sent you to dispute the items.

9

Pay down debts that aren't delinquent to increase your available cash-to-debt ratio, a measure of the money you have available--e.g., unused credit on a credit card--against the debt you have--e.g., money you haven't paid off on a credit card, unpaid medical bills, mortgages or student loans. You want to be sure you aren't carrying large, increasing debt from month to month.

10

Build new credit. Get a new credit card and pay the balance every month. If you're denied, consider applying for a secured credit card to improve your credit score. To get a secured card, you must pay a cash deposit that varies depending on your credit score. This deposit allows a card company to give you credit without risk. A secured credit card allows you to make a positive entry on your credit report, as long as you pay it on time every month.

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Student Loan Consolidation

College education can open doors, but not without a price. Often, people accumulate hefty education loan bills that must be paid--eventually. With more than one student loan, keeping up with loan payments, as well as other everyday expenses, can be difficult. Some people turn to student loan consolidation to relieve the pressure.

Identification

Student loan consolidation involves combining multiple student loans into just one debt. This process refinances a person's student loan debt and can lead to a fixed interest rate rather than multiple loans with different interest rates. Consolidating student loans may save a person money over time and make paying for education easier.

Benefits

There are different types of student loan consolidation. Some consolidation programs allow people to cut their monthly student loan payments in half. Also, consolidation makes repaying debt simple, as a person may only have one debt to pay each month instead of several to remember. In some cases, consolidation may even help to improve a person's credit rating, as he will have just one debt outstanding rather than several.

Types

Federal consolidation is one type of student loan consolidation. This type allows a person to combine all of his federal student loans into just one debt. With consolidation of federal student loans, there are no credit checks, and the borrower will not have to face charges for filing an application. There are no employment, collateral, or cosigner requirements for obtaining a federal student loan consolidation. There are also private loan consolidation programs for those with non-federal loans. These programs reduce the number of private loan payments a person makes per month and may also save her money. However, a person may have to submit to a credit check and secure a cosigner to consolidate private loans.

Considerations

A person must meet certain eligibility requirements to be considered for a federal student loan consolidation. First, he cannot be in default on any of his federal students loans. However, making satisfactory payment arrangements and keeping up with payments can restore eligibility. A full-time student is not eligible for federal student loan consolidation, but someone attending half time or less may be eligible.The requirements differ with private student loan consolidation. Monthly income, collateral and the availability of qualified cosigners all come into play with this type of consolidation.

Time Frame

Student loan consolidation can occur fairly quickly. According to Student Loan Consolidator, private student loan consolidation can occur in 45 days or less. However, time frames vary, depending upon how quickly documentation is provided and how fast other lender requirements are met. Federal student loan consolidation can take from 1 to 3 months to complete.

Misconceptions

It is a misconception that applying for student loan consolidation is difficult or requires a trip to a financial aid office. You can apply for student loan consolidation by phone, through the mail, or even online. The Federal Student Aid website provides application information, resources and links. You may also apply at Student Loan Consolidator.

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Will Debt Settlement Hurt My Credit?

Settling your debts can be a way to save a significant amount of money on the total that you owe. At the same time, you may want to take into consideration what a settlement could do to your credit. This solution is often promoted by debt relief companies, but it could potentially do more harm than good.

Debt Settlement

Debt settlement is a process in which you negotiate a lump sum payment with a creditor. You could also hire a lawyer or debt relief company to do this on your behalf. You agree to pay a lump sum that is less than the total amount of debt. Your creditor agrees to close out your account and will write off the remainder of the debt. In some cases, you may be able to make installment payments for a few months and still get some of the debt forgiven.

Lower Credit Score

One of the most negative effects that comes with settling your debt is the lowering of your credit score. When you settle your debt, the creditor will report that your account has been "settled" instead of paid. This event can lower your credit score by as much as 125 points in some cases. Anytime that a creditor looks to your credit report, they will see that you settled a debt. This can negatively affect your ability to obtain additional financing in the future.

Tax Implications

Besides damaging your credit score directly, a debt settlement can also increase your tax liability. When the creditor settles your account, it writes off the rest of your debt. This results in you receiving extra income according, to the Internal Revenue Service. You have to add this to your taxable income and it will also add to your tax liability. If you cannot pay your taxes, the IRS can place liens on your property or levy your assets. The IRS can also garnish your wages until the debt is repaid.

Fixing the Damage

Although settling your debts can significantly damage your credit score, it is not a permanent mistake. You can take the necessary steps to rebuild your credit and make yourself an attractive borrower again. You can start out by opening another credit account, such as a credit card or store account. Then you can charge small purchases on the credit and pay them off as soon as you receive the bill. The timely payment history will reflect positively on your credit profile. Paying down any other credit balances that you have can also help improve the credit score damage.

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Can You Transfer Student Loans from a Co-signer to a Borrower?

One reason financial experts, such as Mary Rowland of MSN Money Central, tell consumers never to co-sign a loan is that it can be extremely difficult to remove themselves from an agreement. In general, the only way to get out of a co-signed loan is to have the primary borrower get a new contract. However, it is usually far easier to remove a co-signer from a student loan than a normal account.

Identification

It is possible to remove a co-signer from a student loan agreement. In practice, the only guaranteed way to do this is if the primary borrower refinances the loan -- applying for a new loan and using those proceeds to pay an old debt. This assumes that the primary borrower has built enough credit history to qualify for a loan and has verifiable income to cover the monthly payments.

Benefits

Co-signers should get a borrower to refinance the student loan as soon as he can qualify for one on his own. Lenders count co-signed student loans in a persons monthly debt payments to monthly income calculation, which can be more important than a credit score. Also, the co-signer risks his credit rating as long as he puts his name on the account.

Requesting Removal

Lenders of student loans often agree to remove a co-signer if asked, according to Loan.com. The decision to remove a co-signer is up to the lender, so you should not count on this. Also, the lender will review the credit history on the primary borrower to judge if removing the co-signer might affect the chance of default on the loan. Some private student loan lenders include removal of a co-signer as a standard part of the agreement with certain restrictions, such as the borrower must have graduated.

Tip

You should never co-sign a loan just because you are asked, even if it is someone close, maybe a son or daughter. Judge the borrower's ability and willingness to repay debts in the past. If you do co-sign a loan, have funds available to repay the loan in case you have to take over payments. Lenders usually go after a co-signer when the primary account holder defaults. Unlike most loans, the bankruptcy courts almost never discharge student loans, because this would create a moral hazard by allowing people to get a free college education through the legal system.

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The Disadvantages of Inflation Rate

The major disadvantage of the inflation rate is the fact that it represents the lowering of money's value. This means that inflation rates represent a cut in everybody's net worth every year that they occur, which is most years.

However, there are degrees of inflation, with similar degrees of disadvantage. Standard inflation can generally be anticipated and compensated for. However, other forms cannot and have worse consequences.

General Inflation

In general, inflation is the lowering of money's value over time. The disadvantage of this is that it takes more money from one year to the next to buy the same amount of goods. This means that if a laptop costs $1,000 in 2010, and the inflation rate for that year is 3 percent, then it will probably cost around $1,030 the following year. The laptop has not gotten more valuable over time--the dollar has simply become less valuable.

Another reason this is disadvantageous is because it is a hidden cost. So, if you invest your money in a savings account that pays 4 percent interest each year, and the inflation rate is 3 percent, you are actually only making 1 percent on your investment--a 4 percent increase minus a 3 percent decrease in value.

Hyperinflation

Hyperinflation is very rapid inflation. Hyperinflation occurs when the supply of currency is profoundly higher than the demand for it, which is caused by a rapidly deteriorating economy or rapid printing of money by the government. One of the best examples of this is 1920s Germany, when the currency halved in value (which caused prices to double in value) once a day.

The disadvantage of this form of inflation is that it essentially makes money worthless. If the value of a currency is reducing by half once a day, then there is little point in hanging onto money. Imagine a bank account with $1,000 in it on Monday, $500 on Tuesday, $250 on Wednesday, and so on--you would be bankrupt before the end of the week.

Stagflation

Stagflation is high inflation combined with high unemployment. Standard inflation is generally acceptable because the economy grows as the value of the currency falls. While the laptop mentioned above may cost $30 more this year than it did last year, someone who made $100,000 last year will probably make around $103,000 this year, so it ultimately evens out.

However, during stagflation the laptop will still cost more but wages will not have risen. The downside of this is that each year people have less to spend than the previous year, which makes the economy shrink further.

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