If you're drowning in student loan debt, you'll recognize why people use that drowning metaphor. Just like those unable to stay afloat at sea, the common natural emotions for those with seemingly impossible debt include fear, panic, disbelief and eventually resignation. And the victims' desperate flailings and inability to think straight can make rescue more difficult and sometimes impossible. If you've never been in that position, you can't hope to fully understand.
But there are important differences – besides the obvious one that student debt is rarely (though, tragically, not never) fatal. The fear and panic may be intense, but those with serious debt problems have much longer to find a moment of clarity when they can look around and see the various lifelines that are within their grasp. Only relatively few are beyond help, and you may well be pleasantly surprised by your options.
Drowning in Student Loan Debt: Step 1 – Take Stock
If your response so far to your issues has been to adopt an ostrich-like, head-in-the-sands stance, you needn't be ashamed. That's a common reaction to all sorts of unmanageable debt, including among the smartest graduates. What you need to do now is take control of the situation, and your first move must be to fully understand your position.
Make a list of the companies and organizations you owe, and the balances and arrears on each loan. You can probably find out much of that online, starting at the National Student Loan Data System. But, if you have to call some lenders, get on and do it. If you tell the call center agent you're making a start on resolving your problems, there's a good chance you'll get a sympathetic and helpful response. If the agent isn't well trained enough to handle your inquiry in that way, just grit your teeth and get through the call. It'll all be over in a few minutes, and you've been through worse in life.
That first step is likely to be the most difficult in the whole process. True, you've still a long way to go, but you've made a start and have made the monumental decision to regain control of your finances. Chances are you're already going to feel much less stressed and much more empowered.
Step 2 – Check Your Credit
Different people are more or less sensitive to debt. Some may panic while they're still current on payments, but are struggling to make them. Others may hardly think about it until they're far into delinquency or even default. Both types can usually get back on track, but those who act while they're still current or just a little behind are likely to have more options when it comes to reducing their monthly payments through refinancing or consolidating their student debt.
That's because in the eyes of credit bureaus – and thus lenders – they remain more creditworthy. Private lenders are likely to decline student loan refinance applications from those who have bad credit, and offer less attractive interest rates to those whose credit is less than great. Federal student loans, which are generally much less focused on creditworthiness, may be the only choice open to some.
To get a realistic idea of how private lenders will view your application, you need to see your credit report. You're entitled by law to a free copy once each year from each of the main credit bureaus, and you can get yours through annualcreditreport.com. You can also check and continually monitor your credit score (which is simply the contents of your credit report run through algorithms so they can be expressed as a single number) through the free LendingTree service.
Step 3 – Research and Alignment
Your next step is to find out all you can about the different ways to refinance or consolidate your debt. You then need to align your options with your needs. If you're less than confident about your future earning potential, you may ultimately be better off with federal loans. These may cost a bit more in interest, but they can be much more flexible if your income suddenly dips. Learn more at 6 Top FAQs for Student Loan Income-Driven Repayment Plans.
If your credit's still good, you may do best by refinancing with a private lender at a lower rate or over a longer period, or both. But don't feel the need to refinance all your student loans within one big one. If you're getting a better rate on some of your existing ones than you're being offered by the refinance lender, cherry pick the ones that will lower your payments. And, as with any financial product, shop around to make sure you get the very best deal.
Think carefully before you refinance federal debt with a private lender. You'll likely be trading the flexibility you may need if you get into trouble later for a lower rate. In some circumstances, that can be perfectly sensible, but that's going to depend on how much financial security your career provides. Again, you can cherry pick the loans you want to refinance.
One Step at a Time
If you feel you're drowning in student loan debt, it can be hard to see yourself going through these steps: Ostriches, you may think, make a good point. But the first step is by far the hardest, and after that tough hour or two, the others follow more easily. And the burden you feel lifting off your shoulders as you take each step will make it all worthwhile – and then some.