Student loans: Answers to your 9 biggest questions about college debt

Still paying off your student loans? You’re in good company. Some 42.4 million Americans still owe money on their federal student loans.

Of course, racking up debt is the easy part. It’s figuring out how to make the monthly payments, all while dodging scams offering dubious debt forgiveness and loan consolidation schemes, that can be tough. As of the end of 2016, about one in six borrowers had defaulted on their payments.

The good news is, you’ve got lots of options before it comes to that, including legitimate refinancing deals to help lower your monthly payments. With a new school year just around the corner, Mic canvassed borrowers on staff to find out their biggest student loan questions — from how to get loan forgiveness to how much you can borrow in the first place.

Here are the answers:

1. What’s a normal amount of student debt?

First of all, it’s perfectly normal to have student debt. Nearly 70% of college seniors graduate with student debt, according to a 2016 report from the Institute for College Access & Success.

But you might be wondering how your debt compares to everyone else’s. With total student debt in the U.S. reaching $1.4 trillion at the end of the second quarter of 2017, according to the Federal Reserve, the average borrower now owes $37,172 when they enter the workforce.

How does that work out on a monthly basis? A 2016 paper from the Cleveland Federal Reserve found that the average student loan payment in 2015 for people aged 20 to 30 was $351 per month — but that number was skewed, the report says, by a very small number of very high loans. More than half of Americans, for example, have monthly student loan payments below $250.

2. I want to go to grad school but already have a ton of student loan debt. Is there a limit to how much I can take out?

In a word, yes. For undergraduates who are dependents (meaning someone like your parents has you listed as a dependent on their tax returns), the maximum amount of federal loans you can take out is $31,000, no more than $23,000 of which can be subsidized, according to the Department of Education. Loans are considered subsidized when the interest is paid by the government while you’re in school.

For graduate degrees, that limit goes up to $138,500, no more than $65,500 of which can be subsidized. There are exceptions for some health degrees, but once you hit your limit, you’ve got two choices: pay down your balance before borrowing more or turn to an outside private lender. A smarter bet is to work part-time or look for grants or scholarships before adding to your debt load.

3. My parents filled out my student loan applications before, but now I have to do it myself. How do I get started?

The first step is to complete the Free Application for Federal Student Aid (FAFSA), which you can start filling out on October 1 for the 2018-19 school year. The purpose of the FAFSA is to determine your financial need based on things like your income and whether or not you are a dependent on someone else’s tax returns. Filling out the form is easy, but you’ll need your Social Security number, most recent tax returns and bank statements to complete it.

Next, fill out the financial aid application provided by your school, which will use the information about your income from the FAFSA to determine your mix of financial aid (which you don’t pay back), and loans (which you do). You’ll typically have until about May 1 (or sooner if you are an early admission applicant) to accept the reward. If you don’t need the entire loan amount offered, you can also opt to accept part of it.

Lastly, you must sign a promissory note agreeing to the terms of the loan before the funds are paid out.

4. What’s the difference between a private loan and a public one?

The vast majority of student loans are public, which means they are underwritten by the Department of Education. The most important difference between public and private loans is that the interest rates for public student loans are set by Congress and tend to be much more affordable: The highest interest rates for loans to students offered by the federal government — direct unsubsidized graduate or professional loans — are 6%.

Only 6% of borrowers took out private loans in the 2011 to 2012 academic year. Rates for private lenders like Discover or Ascent can top 14% and do not come with important protections offered by federal loans, like the right to apply for income-driven repayment — an option available to federal borrowers to cap their payments at a certain amount, usually 10% of their income.

5. Can I get out of my student debt if I file for bankruptcy?

Student debt has a few unique characteristics from other forms of consumer debt like credit cards and mortgages. One of the most important distinctions is that student debt is more difficult to discharge in bankruptcy than other forms of debt. Indeed, some horror stories about student loans have led to the myth that student loans cannot be wiped out even in extreme cases like death or when you declare bankruptcy.

While it’s true that it’s harder to get rid of student debt than other kinds of consumer debt, it’s not impossible. The trick is, you have to pass what is known as the Brunner test to make that happen. Usually that requires meeting a factor to prove undue hardship, like making a good-faith effort to pay back your loans before filing bankruptcy or being unable to make student loan payments while maintaining a minimum standard of life for much or all of the repayment period.

The Brunner test “only applies to loans made by the federal government or a non-profit,” Stanley Tate, a Missouri-based attorney who specializes in student loans, explained in a phone interview. “[Private loans] are getting easier to discharge in bankruptcy.”

6. How many days late can I be on my payments before my credit score gets dinged?

As far as your credit score is concerned, student loan debt can actually be pretty forgiving. In addition to what’s typically a six-month grace period, student loan debt does not go into delinquency until 90 days after your first late payment, at which point your servicer will report it to the credit bureaus.

Technically, that gives you nearly nine months of not paying your student loans before your credit score will be affected — although this strategy is not advisable since your interest begins accruing as soon as you graduate.

7. My monthly payments are too high. Should I refinance?

Refinancing can save you thousands of dollars, but you need to proceed with care. One recent analysis found that refinancers with a median balance of $15,000 saved about $3,000 over the next 10 or 15 years, depending on the specific terms of their loan. In order to qualify for the best rates, you’ll also need a spotless payment record and a solid credit score of 740 or more.

To refinance a federal loan, you have to switch to a private lender, since the federal government does not provide refinancing. That means that you will lose many of the protections that come with your orginal federal loan, the most important of which is the ability to apply for income-driven repayment plans or apply for loan forgiveness for working in public service.

But if you’re confident about your future earnings, and especially if you’re unhappy with the servicer on your federal student loans, then there’s a good argument for checking typical rates based on your loan balance, income and credit score to see how much you can save. Just be sure to confine your search for refinancing to a short period of time (about 30 days), as each inquiry on your credit can lower your credit score.

8. What is loan forgiveness and how can I qualify?

The Public Service Loan Forgiveness program forgives the remaining balance on your loans for debtors in a handful of fields after 120 on-time payments (about 10 years). All types of jobs can qualify for the program, as long as you work for a government organization or a non-for-profit with tax-deductible status from the IRS. Volunteers through Peace Corps or AmeriCorps programs can also qualify for forgiveness.

If you work in the private sector, you might be able to find an employer willing to help you pay off your student loans. It’s an uncommon perk — only about 4% of jobs offer student loan disbursements as part of their benefits package, according to the Society for Human Resource Management’s latest report —but that’s still a slight uptick from only 3% of employers in 2015.

One thing to be extra cautious about is scammers who offer to make your debt go away like magic. A good rule for spotting scams is to never, ever pay for services upfront, especially if services sound too good to be true.

9. Who pays off the rest of my loan if it’s forgiven?

If you are able to get your student loans discharged or forgiven, then someone is ultimately on the hook for the money you borrowed. In the case of a private loan, this will be the financial institution that originated the loan, but in the case of public loans then the check ultimately winds up being picked up by taxpayers.

Because some fear that the program is too costly, there is a chance the program will be rolled back, though these changes might not be so far-reaching as some advocates feared. Under current law, for example, any amount of student debt can be forgiven if a borrow meets all the conditions, even if they borrowed hundreds of thousands of dollars. Congress might reform the program by instituting a cap.

For more on how to get student loans forgiven, or stories about people who paid off six-figure debt, check out our guides here and here.

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