How to Start a Business With Student Loans

Is there a way to shrink my loan payments while we are trying to get off the ground?  I want to quit my job to pursue a startup, but have $35,000 of student loan debt 

Today student loans represent the single largest debt burden for people under 40. In fact, from 2004 to 2009, only 37 percent of federal borrowers managed to make timely payments without postponing or becoming delinquent. Those most likely to default are unemployed or underemployed. Startup life, where income is anything but certain, qualifies you for the high risk camp, so it's important to know your options.

There are a handful of alternatives to help you reduce your debt burden in the short term. The first step is to identify whether your student loans are federal, private or a combination of the two.
Federal loans can be consolidated to reduce monthly payments.

While you won't be able to lower your rate, extending your term from 10 to 25 years will reduce the amount you owe each month by 40 percent, from $402 to $267 per month. Selecting a graduated pay option can further minimize upfront payments. Borrowers start with a reduced monthly payment, which gradually increases after year two and four, settling into a higher standard monthly payment in year six for the duration of the loan.

Federal borrowers facing periods of low or no income can also file for Income Based Repayment (IBR) or Pay As You Earn (PAYE), which cap your monthly payments to a percentage of what you earn, not what you owe, according to Gary Carpenter, CPA and Executive Director of National College Advocacy Group, which supplies information regarding student loans. This means that if your income suddenly drops or stops altogether, you may have a zero monthly balance.

Monthly payments under IBR and PAYE repayment plans are capped at 15 or 10 percent of your discretionary income, based on federal guidelines. Borrowers must qualify and file an application annually with the Department of Education. And under new law, any balance remaining after 20 to 25 years of consistent payment will be forgiven.
As of 2012, only 700,000 borrowers were enrolled in IBR. The Obama Administration estimates that IBR could reduce payments for 1.6 million borrowers.

Options to defer private student loans are more limited. Few private lenders consolidate loans, and even those that do won't reduce your rate or extend repayment terms. Most will offer need-based forbearance, or a 12-month break from making payments. Some offer up to three 12-month grace periods to defer payments.

It's important to note that short-term debt relief is not without long-term pitfalls. Reducing your monthly payments does not make the debt go away. Simply stretching the term of a $35,000 federal loan from 10 to 25 years triples the interest due over the lifetime of the loan, from $13,000 to $39,000. And when the amount you pay each month doesn't cover interest, negative amortization can cause your loan balance to grow exponentially.

Taking the easy road today may set you up for a tough climb later. "Young people often focus on today's cash flow, ignoring they have the work of their life ahead of them," says Eleanor Blayney consumer advocate for the CFP Board, a non-profit that qualifies investment professional to become certified financial planners. "Electing for a long repayment cycle can set you up for debt drag that eclipses other important milestones in life such as buying a home, preparing for retirement and saving for marriage and children."

As an alternative to dragging out your loans, consider crafting a pre-emptive savings strategy to help you stay current while income is influx. In Eric's case, that means you'd aim to save two years worth of payments or $10,000 for an outstanding balance of $35,000. To build your nest egg, consider working in your present job a little longer or take on a consulting gig to throw off extra income.
Budget six to eight months to earn more and make lifestyle sacrifices such as taking on a roommate, cutting down meals out and extraneous expenses to help you save. An easy to use monthly payment calculator can help you determine your budget.

Despite the inability to shake student loan debt, more than 14 percent of borrowers have loans that are overdue. "If down the road you get into trouble, don't ignore your student loans. They can't be discharged in bankruptcy. They will be around no matter what," says Carpenter. "Contact your lender to create an alternative payment plan They don't want to see your loan go into collection either."
The bottom line is that getting a pass today means you're electing to double-down on your future success. Adding $26,000 to your interest burden won't seem like a lot if your business is successful but there's no escaping the fact that you are digging the hole deeper and reducing your financial flexibility.

The preferred solution would be to find a way to save as much money as you can during the startup phase and leave the structure of your debt unchanged. Think about how you can really rein in personal expenses in the near term. You'll be better positioned to pursue the startup route and will maintain some of your financial freedom.

Src: http://www.entrepreneur.com/article/227715#ixzz2cxy1nDC7

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Student Loan Explanation

What Is Student Loan ?

A loan offered to students which is used to pay off education-related expenses, such as college tuition, room and board at the university, or textbooks. Many of these loans are offered to students at a lower interest rate, such as the Perkins loan or Stafford loan. In general, students are not required to pay back these loans until the end of a grace period, which usually begins after they have completed their education.

A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in education. It also differs in many countries in the strict laws regulating renegotiating and bankruptcy.

Student Loan In United States

In the United States, there are two types of student loans: federal loans sponsored by the federal government and private student loans, which broadly includes state-affiliated nonprofits and institutional loans provided by schools. The overwhelming majority of student loans are federal loans. Federal loans can be "subsidized" or "unsubsidized". Interest does not accrue on subsidized loans while the students are in school. Student loans may be offered as part of a total financial aid package that may also include grants, scholarships, and/or work study opportunities.
Prior to 2010, federal loans were also divided between direct loans (which are originated and funded by the federal government) and guaranteed loans, originated and held by private lenders but guaranteed by the government. The guaranteed lending program was eliminated in 2010 because of a widespread perception that the government guarantees boosted student lending companies' profits but did not benefit students by reducing student loan costs.

Federal Student loans are generally less expensive than private student loans. However, the federal student lending program still generates billions of dollars in profit for the government each year, because the interest payments exceed the government's own borrowing costs, loan losses, and administrative costs. Losses on student loans are extremely low, even when students default, in part because these loans cannot be discharged in bankruptcy unless repaying the loan would create an "undue hardship" for the student borrower and his or her dependents. In 2005, the bankruptcy laws were changed so that private educational loans also could not be readily discharged. Supporters of this change claimed that it would reduce student loan interest rates.

Student Loan In United Kingdom

Student loans in the United Kingdom are primarily provided by the state-owned Student Loans Company. Interest begins to accumulate on each loan payment as soon as the student receives it, but repayment is not required until the start of the next tax year after the student completes (or abandons) their education.
Since 1998, repayments have been collected by HMRC via the tax system, and are calculated based on the borrower's current level of income. If the borrower's income is below a certain threshold (£15,000 per tax year for 2011/2012, £21,000 per tax year for 2012/2013), no repayments are required, though interest continues to accumulate.
Loans are cancelled if the borrower dies or becomes permanently unable to work. Depending on when the loan was taken out and which part of the UK the borrower is from, they may also be cancelled after a certain period of time usually after 30 years, or when the borrower reaches a certain age.


Ref : http://en.wikipedia.org/wiki/Student_loan

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LOAN explanation

In finance, a loan is a debt evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment. A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower.

In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each installment is the same amount.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. In a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. Although this article focuses on monetary loans, in practice any material object might be lent.
Acting as a provider of loans is one of the principal tasks for financial institutions. For other institutions, issuing of debt contracts such as bonds is a typical source of funding.

Types of loans

1. Secured

   A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral.
   A mortgage loan is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The financial institution, however, is given security — a lien on the title to the house — until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it.
   In some instances, a loan taken out to purchase a new or used car may be secured by the car, in much the same way as a mortgage is secured by housing. The duration of the loan period is considerably shorter — often corresponding to the useful life of the car. There are two types of auto loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer.
   

2. Unsecured

   Unsecured loans are monetary loans that are not secured against the borrower's assets. These may be available from financial institutions under many different guises or marketing packages:
   
   • credit card debt
   • personal loans
   • bank overdrafts
   • credit facilities or lines of credit
   • corporate bonds (may be secured or unsecured)
   The interest rates applicable to these different forms may vary depending on the lender and the borrower. These may or may not be regulated by law. In the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974.
   Interest rates on unsecured loans are nearly always higher than for secured loans, because an unsecured lender's options for recourse against the borrower in the event of default are severely limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrower's unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible.

3. Demand

   Demand loans are short term loans  that are atypical in that they do not have fixed dates for repayment and carry a floating interest rate which varies according to the prime rate. They can be "called" for repayment by the lending institution at any time. Demand loans may be unsecured or secured.

4. Subsidized

   A subsidized loan is a loan on which the interest is reduced by an explicit or hidden subsidy. In the context of college loans in the United States, it refers to a loan on which no interest is accrued while a student remains enrolled in education.

5. Concessional

   A concessional loan, sometimes called a "soft loan," is granted on terms substantially more generous than market loans either through below-market interest rates, by grace periods or a combination of both. Such loans may be made by foreign governments to poor countries or may be offered to employees of lending institutions as an employee benefit.

That's all explanation about loan, hopefully useful for you! Ref : http://en.wikipedia.org/wiki/Loan

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