This piece originally appeared on AllBusiness.com.
Hefty student loans have become a reality for many recent college grads. While student debt has always existed, the figures have become staggering due to rising tuition rates and increased borrowing. The concern is that this large amount of debt is subduing spending and therefore economic growth as young Millennials pay off loans instead of stimulating the economy.
So how does this relate to your business? Well, whether you consciously feel the pinch or not, your ability to buy a business or invest in your existing one and finance growth is determined by your personal finances, especially when you are developing a startup or new venture.
Similarly, even if you’ve been in business for a while, significant capital expenditures are often made out-of-pocket as loans to your company. Unfortunately, if your personal financial situation is being hindered by steep graduate school loan payments, then you may not have the funds available to grow and achieve that next level of long-term growth.
If you are looking to buy a business that will need financing or own an existing business that requires capital to grow, here are some ways to lower the cost of your student debt and strengthen your personal finances, thereby putting yourself in a healthier position to get approved for a purchase or personally fund growth.
Background on student loans
The best time to make wise loan decisions is when choosing a loan in the first place, but many people make those decisions uninformed, and must do the best they can after they graduate and start receiving bills in the mail.
Once your student loans enter repayment, which is usually six months after graduation, you are faced with fewer options. Those who can’t pay will become familiar with terms like forbearance or deferment, meaning you are given a grace period to find a job or figure out a way to repay.
Some business owners may consider refinancing their loans to get a better interest rate or new repayment terms. Another option is loan consolidation, which essentially means combining different types of loans, or loans from different lenders and rolling them together into one sum with one interest rate.
The key to choosing how to best approach all of these options, and the new vocabulary that comes along with them, is to do your homework. It might seem like the research is never quite over, but how well you cross your T’s and dot your I’s could make a big difference to your bank account over the course of your personal and business life.
What do I do about my federal loans?
Federal student loans cannot be consolidated with private loans on a federal level. However, private lenders will allow you to consolidate your federal loans into a private loan. Some students choose to roll their loans into one private loan because it streamlines things; there’s only one entity to pay, one schedule to follow, one date to remember to pay by.
Nevertheless, it is important to remember that repayment options are generally more flexible at the federal level–after all, the federal government isn’t trying to make money off you. Ultimately, it may make more sense to deal with remembering to pay different entities than it does to potentially add your federal loan balance to what might be less favorable terms with a private lender.
What’s the deal with these startup lenders?
Companies like Cedar Education Lending, SOFI, and Earnest are non-bank alternatives that provide loans to students as well as individuals who may be seeking mortgages or other types of personal loans. Generally, these startup companies provide rates that can be lower, but make sure you check whether a loan rate is fixed or variable. Variable rates mean that the interest you pay can increase, and given that we are in an increasing-rate environment, you are only likely to pay more as time passes.
Options for when you can’t make payments.
Always try to make your payments—that might mean going through your budget and spending habits to find cuts. If you are having coffee out every day or buying lunch on the go, those expenditures can quickly add up, so if you are going to take a grace period from your lender, be sure you truly need it because they are limited.
If after reviewing your budget, you realize you’re actually pinching pennies and cannot pay your monthly balance, there are a few options. First, call your lender and explain your situation—they may have options available. Most lenders empathize with a struggling borrower. Remember, you’re a customer and it’s best for them to try to keep customers happy. One trick might be extending your repayment time so that you owe less each month; another option is to refinance your student loans so that the lower interest rate reduces what you owe each month.
My business is going bankrupt — now what?
Most lenders offer options in anticipation of job loss or adverse business situations, and they include short-term deferment or forbearance. Federal loans are much easier to deal with in these cases, because they often have longer grace periods and income-based programs. If your income is low enough, you don’t owe anything for the time-being.
For private loan holders, a forbearance or deferment could give you six months to a year of breathing room so there’s less pressure on you to make monthly payments while saving your business or finding a job. Essentially, you can temporarily suspend or reduce your loan payments. If you want to retain these forgiveness periods, see if you can approach a family member regarding a short-term solution to help pay your loans on time.
If I have bad credit: can I still consolidate or refinance?
Unfortunately, lenders generally take a close look at your financial history. If you have no credit or a credit score below 680, it could be difficult to refinance and secure a lower interest rate on your student loans. You have two options: add a cosigner or wait till you build up your credit further. It won’t happen overnight, but if you chip away diligently and have good financial practices, your score will slowly rise. As far as consolidation, credit does not generally affect that option.
After consolidation, can I still refinance?
It’s possible.While consolidation is usually part of the refinancing process, you aren’t precluded from refinancing if you’ve already consolidated. You do have to be the borrower listed on the loan, and both previously consolidated federal and private loans are usually eligible. No matter the type of loan, the same rules apply: you’ll get a new rate and new terms.
The final word.
Your student loan payments may have just been a line item in your budget that you considered a fixed cost, but if your personal finances are affecting your ability to take advantage of business opportunities, it may be time to research ways to free up some capital to invest in your company.
While the best course of action for you is unique to your specific loan type, interest rate, credit history, and personal financial situation, at minimum, you owe it to yourself and your business’s future to explore your options.
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