A Rough Guide to Repaying Student Loans
There are really two things to know about student loans: How to get them, and what to do when you have to start paying them back. I’m going to write about the latter, as I am more experienced with that aspect. It seems everyone can figure out how to get student loans (whether or not they are getting the best deal), but paying them back can be more confusing.
Most federal student loans come with a grace period of six months during which you are not required to make payments. That means if you graduated in May of this year, your grace period is coming to a close and you have some decisions to make.
What do I owe?
The first step is to find out how much you owe and to whom. Your financial aid office can help you with this, as can this site.
There are three major types of federal loans you may have: Federal Subsidized Stafford, Federal Unsubsidized Stafford, and the Federal Perkins loan. Some people may also have private loans, which I’ll cover at the end of this article. (They’re a different beast than federal loans.) For now, let’s focus on the federal loans. According to the U.S. government’s Student Aid site:
During the grace period on a subsidized loan, you don’t have to pay any principal, and you won’t be charged interest. During the grace period on an unsubsidized loan, you don’t have to pay any principal, but you will be charged interest. You can either pay the interest or it will be capitalized (added to your principal loan balance, thus increasing the amount you’ll repay).
Can someone PLEASE make these go away?
You may feel overwhelmed by your loans and wish that they would just go away. Actually, there are a few ways that they can be diminished without you paying them, but these are special cases. Most of us are going to pay back every dollar we borrowed. And more.
If you are interested in volunteer work, check out the benefits provided by joining the Peace Corps or AmeriCorps. (For strictly financial reasons, you are probably better off getting a job and paying back the loans, but there are other reasons you may want to consider volunteering). If you are planning to be a teacher, join the military, or work in the legal or medical profession, there are some loan forgiveness programs you might be able to take advantage of.
Other than that, your student loans are going to be with you until you pay them back. Even bankruptcy will not destroy them. (But if you die, they are forgiven.) If your best shot of getting out of your loans is death, you probably should start working on a plan to repay them.
What is consolidation?
Consolidating your federal student loans may lower your total monthly payment, but note this is primarily because you are extending the terms of your loan and paying more interest in the long run. If you can afford your monthly payment, and would rather not have a loan for 20 years, you still should consider consolidation. You also can stick with a standard repayment if you know you can afford it and don’t think you are disciplined enough to make extra payments. There are no prepayment penalties in consolidation loans and there are a lot of benefits.
Can I consolidate?
Before you concern yourself with whether you should consolidate, you should check to make sure you are eligible. If you haven’t graduated yet, you cannot consolidate your loans. (This was not true a year ago!) You must either be in your six-month grace period or in repayment. You must have eligible loans, usually totaling over $7,500 (you may be able to find some lenders who will do it for less). You can consolidate a single loan, as long as the loan being consolidated has not previously been consolidated. You can’t consolidate with your spouse anymore, but that was usually a bad idea anyway.
Should I consolidate?
Student loan rates are adjusted annually on July 31st, based on the 91-day T-bill rates.
Years ago, rates were very low (as low as 2%!), and consolidation was a no-brainer. When I consolidated, they were around 4.5%. As of today, you can probably consolidate at 6.62% (before discounts) if you are in your grace period. If you don’t consolidate, that rate will jump to 7.22% when the grace period ends.
Students who received Stafford Loans on or after 01 July 2006 have a fixed 6.8% rate of interest for the life of their loan. The rate on previous loans will continue to be adjusted annually. If you have loans that were dispersed both before and after that date, the interest rate is averaged and weighted accordingly.
The decision isn’t as clear-cut as it once was — it’s something you have to decide for yourself. But my opinion is that for most people, consolidation makes a lot of sense. If you aren’t happy with the current rates you could wait for lower rates, but who knows when they will be coming? In the meantime, you’ll be subject to a variable interest rate. Consolidating now may result in lower payments and a lower fixed interest rate immediately.
How do I consolidate my loans?
From the day I graduated (and even before), my mailbox was filled with offers to consolidate my student loans. Why does everyone want to help me with this? I was surprised to learn that my student loans are backed by the US government. If I default on my loan, the government will pay it, then try to get the money from me themselves. This means that the companies are essentially guaranteed to get their money back! Because of this, you will have plenty of offers to choose from. In reality, most of the offers are nearly identical, but pick wisely — this is a relationship you may have for a long time!
Remember, if you consolidate during your grace period, you can lock in your interest rate 0.6% lower and still not make any payments until your grace period ends. If you graduated last May, your grace period is probably ending very soon. Don’t hesitate!
Here are some important things to consider when choosing a lender:
- interest rate (will likely be the same for all lenders)
- discounts for auto-payment
- discounts for on-time payments
- website and user interface for payments
- ability to pay with credit card with no fee (to get cash back bonus, not to convert to credit card debt!)
- ability to use Upromise rewards to
pay back the loan (Sallie Mae)
I chose Wells Fargo because my other banking is there, making it really easy to make extra payments. I wouldn’t exactly recommend them (a lot went wrong during the consolidation process), but now that everything is consolidated, they are working out just fine. Honestly, I wasn’t as well informed as I should have been, and if I could do it again, I’d do more research.
Here are some sites to get you started on your research:
- FinAid.org advice
- More research at the Kiplinger’s forums
- FinAid.org List of lenders
What if I can not afford my payments?
If you are unable to pay the monthly bill, there are a few things you can do, all starting with talking to your lender.
- You can usually arrange an alternative payment plan, where you pay less now and payments increase as your income increases.
- You may also qualify for a deferment, in which you are not required to make payments for a set period of time (interest will still accrue, though!). Your credit score will not be hurt, but these require special circumstances.
- As a last resort, there is the option of forbearance. This is similar to deferment, but you don’t need qualifying circumstances, and it will negatively impact your credit score.
I can pay them… and more! Should I pay them back quickly?
The general advice on this is no, as long as the interest rate is low. This does make sense if you are investing the difference between what you can pay and what you are paying. By the math, you should hang on to them as long as the term allows. Personally, my loan is for 20 years, and I just don’t think I want to have them around when I’m in my 40s. Mathematically sound or not, I will be paying them off a bit early, but they are the lowest priority of my financial goals. The Get Rich Slowly philosophy “Do what works for you” certainly applies here.
The most often cited reason for not repaying student loans early is that the interest is generally tax deductible and you don’t even have to itemize to take this deduction. Also, if you have a government loan, your money usually can make more for you elsewhere, though there is often more risk involved. If choosing between a Roth/401k or paying off loans early, I would recommend investing in your future.
What about private loans?
Private loans usually aren’t low-interest, and they don’t have as many nice benefits as federal loans. If you consolidate, you typically aren’t locking into a lower rate, just switching lenders. There may be some benefits, but be skeptical and don’t consolidate them with your federal loans, as you will lose some important benefits. The best way to handle private loans is to pay them off as soon as possible.
Among the reasons private loans should be repaid as soon as possible:
- You cannot defer payments on a private loan consolidation if you want to go back to school.
- You cannot forbear payments in case of economic hardship.
- You cannot apply for forgiveness on a private loan consolidation.
- If you should pass away, private loans are passed to your next of kin. Federal loans are forgiven.
- Private loan consolidation very often has variable rates, which means you cannot lock in today’s current historic low rates. Those rates may be tied to volatile indexes like the Prime Rate, which can jump as high as 13%.
My private loans were somewhere around 8%, and I paid them off in about six months. I focused all of my financial energy on them, and even did a balance transfer to a 0% interest card, but paid it off as quickly as I could.
For more information on anything about student loans, visit FinAid! This site is excellent and should answer all of your questions.
There are certain aspects of personal finance that I’ve never had to deal with. Student loans are one of these. But student loans are a huge concern for many people. This post from SJean is an introduction to repaying these debts. You can read more from SJean at Stacking Pennies.
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There are 56 comments to "A Rough Guide to Repaying Student Loans".
For existing students: Try to get DIRECT Student Loans if at all possible. It’s the same Stafford/Perkins loans, but these loans come straight from the US Dept. of Education and are not routed through agencies like Sallie Mae. (US Dept. of Ed is MUCH easier to deal with, imo.)
You can check/change status, apply for consolidation and make payments for Direct loans through the https://www.dlssonline.com website.
You can also pay the accumulating interest on the loans while in your grace period, which will really help in the long run (I ended up only having $43 of interest added to my loan when I started payments).
If you sign up for automated payment you get an additional 0.25% discount on your interest rate.
Another thing I would point out is the standard plan for paying back a student loan is 10 years, but this can be adjusted up to 30 years.
I’ll put a plug to the official student aid site again: http://studentaid.ed.gov because it is a very helpful resource, but was only given a cursory glance in this guest-post.
I’m not so sure that private loans are “passed on” to next of kin. A cosigner could be potentially liable and the balance will be taken out of the estate (which will reduce potential inheritance), but I’m pretty sure kin will not be personally liable.
A coworker and his wife (soon to be ex) are in a pretty bad place financially because of student loans.
I don’t know all the details but from what I’ve gathered, they can’t keep up with the interest payments so the loans continue to increase both in interest and in fees, for missing payments and not paying the full amount. And, they consolidated years ago, before rates were low, so the interest rate is around 8%. Apparently, you can only consolidate once, so they couldn’t get the lower rates when they were available the last few years.
From what he has said, after 25 years or so, the loans are forgiven, but what they forgive counts as income to the IRS, so they will then have a large tax bill after that, and unless they can work out some payment plan with the IRS for additional years, I doubt they would have enough to cover the full amount in one year.
They can’t get rid of the loans in bankruptcy, so they will just have to carry on for the next couple of decades and see what happens. I think his wages may actually be garnished at this point, and I know he’s not saving anything for retirement. He’s also been to several layers and a financial planner who have told him they can’t help him in his situation.
I don’t think he spends money very carefully, so I’m not saying he doesn’t have some responsibility for the situation. But, when he’s in beyond what he can afford, the balance only continues to increase, and he can’t get rid of any portion of the loans I can’t help but feel that there ought to be some protections for situations like that.
YAY!! Perfect timing. I just started a Financial Planning group with my girlfriends to help us talk out money issues. This is perfect timing to talk about student loans since i just posted the link to this website on our group website.
There is one way to reconsolidate a student loan, and that’s if you have a NEW student loan to roll into it.
Unfortunately, the interest rate you locked in the first time will be applied, even if the interest rate when you reconsolidate would be lower, which is bad news (of course, if it’s higher then this is good news since it can’t be raised either). It’s also the only way I found that lets you switch companies once you’ve consolidated.
This is from personal experience. When I was young and desperate for education I wish I’d realized what a draconian monster I was dealing with.
First off, I want to say thank you for this informative guide!
I’ve been paying off my student loans for about 2 years now. Thankfully they’re federal loans (unsubsidized, but still), so I have all of the benefits you described. And, like you mentioned, they are my lowest priority, as they are locked in at 6.5%.
One important note you didn’t mention is whether to consolidate two student loans together – such as a husband and wife. Personally, my wife and I chose not to do this. If I do happen to kick the bucket, I’d rather the loan go away than her to have one more bill to worry about.
Also, while poking around the Loan Forgiveness link you gave, I found out that there is now more help than you mentioned – public service employees can get forgiveness now too, thanks to the College Cost Reduction and Access Act of 2007. (see http://www.finaid.org/loans/publicservice.phtml). I don’t think it will help me, though, as our loans have a 10-year pay off, and you need 10 years of service for the forgiveness.
http://www.whatsthecost.com/snowball.aspx?country=us
I have almost $50K in student loans. I ran my debts through this website. It gave me the snowball schedule to pay it off (and some other stuff) in 4 years. I get no tax deduction on my student loans because my income is too high, so it doesn’t help me at all to take my time paying it off. But this website is excellent (and I’m sure there are others like it) to make the process a little easier. I can’t wait to have this thing paid off!
Awesome article!
I had about 11k in student loans and now I’m down to under 2k (yay!). When I first graduated, I was really excited about paying them off because the interest was deducted, but once I made too much, I slowed down my payments considerably. At this point, my loan is a mental ‘thorn in my side’, so I want to pay them off as soon as possible, and focus on other bills. It’s one less piece of mail I have to worry about. The good news is that because I pay more than usual, my current due date is July, 2008. If an emergency comes up, I know that I will not be forced to pay for my student loan until then, but I plan on paying it all off by at least February, 2008. The reduction in percentage points for online payments is a nice option too. Every cent saved counts.
Hi, I’m the guest author and am glad that my information is useful to some! There is so much information out there, I knew I’d miss a few things. Thanks for adding your tips and comments!
I wanted to address Jared’s note about consolidating with a spouse. I did note that that is no longer allowed by govt regulations.
As for being passed on to next of kin, i did have a source that said that, but perhaps it was outdated/wrong. Hmm.
This is an excellent post! I just got a lovely letter from Sallie detailing when and how I will pay them back. I only owe $7k so I guess I won’t be able to consolidate. I had hoped to just write a check and pay them off at the end of the grace period, but since I don’t have a job yet (sigh) that isn’t possible.
It’s even worse for grad school though, because you don’t have the same options as undergrad. We have been researching our options, and wow! Not only is it hard to find info, but the payments are so high!
Glad for the tip about loan forgiveness though, as hubby is planning to be a teacher. We had never heard of that before.
Thanks to a couple blessings we received in the last week, we’re going to finally pay off my student loans, which have a hefty balance still.
Sure, we could take the money and buy all kinds of things, but I’ve had these outstanding since 1999. Not as long as some people, but I think 8 years is plenty of time to be in debt on something that isn’t a house.
Considering what we’ve been paying extra on them for the last several months as part of the debt snowball, this will free up $2000 per month. I think I can go buy some stuff with $2000/mo :).
Yes, thank you thank you for creating this. I go into repayment this month and it was helpful (even though it hurts) to know that as a private loan holder I had best just git a move on with payments, suck it up and sink the ship asap. This is an extremely timely article for me, and extremely high-quality. Thank you.
I’m a big believer in paying off student loans as early as possible. Here’s why:
1) the interest is not deductible after a certain income level. I’ve never seen this advantage some of you speak of.
2) The debt is inalienable. If I decide I can’t afford my home mortgage or my car payment, I have an asset there that I can sell to change the situation. Sure, I might still have financial issues, but the facts are that barring certain crazy factors, I can get out from under those debts with real mitigation of loss or even some gain (on the house side).
I can’t sell you my law degree.
I can’t tell you how much student loan debt has shaped my job choices. Far more than anything else. I graduated with 110K+ in debt. I’m still glad that I went to school where I did, but the ramifications of that type of student loan debt are just not easily understood until you are out in the real world and you want to take that better (but lower paying) job and you realize that because of your student loan debt, you really can’t afford to without radical lifestyle shrinkage.
It is one of the reasons why I am often advising people thinking of paying their own way through grad school with loans to look very seriously at whether that makes sense.
Also, I can’t dismiss the psychological factor. Student loan debt is essentially a mortgage on your life. That really does have a different feel to it than a home mortgage. Personally, I can’t wait to be done with my student loans. And two more years, I should be.
Another good website for tracking one’s federal student loans in the United States:
The National Student Loan Data System, at http://www.nslds.ed.gov. This system also tracks any Pell grant money one may have been lucky enough to receive. To login, one needs one’s social security number and FAFSA PIN.
My school uses this site to track previous loan data and to try to figure out consolidation issues when a student appears to have borrowed more than the maximum allowed to undergraduates ($23,000 subsidized, $23,000 unsubsidized; maximum $46,000 before receiving a bachelor’s; the amount skyrockets after that).
I’ve been paying on my student loans for 7 years now and I’ve basically followed most of this advice. I went into school with pretty much no aid and had to use loans to pay for eveything and ended up wtih about $30k all together. I’ve paid off about 1/3 of it and only last year, when we started really trying to pay off our debt, I wondered why it didn’t seem to be going down much at all.
I really, really looked over my terms on the web site and realized that because I selected a teired program, where I just paid some at the start and it gradually went up over time, that I had just been paying interest for years and I was just starting to actually pay SOME towards the balance now. And even that was still really low!
Out of my $170 payment to them a month, only $13 was going towards my principal!! After deciding on a debt plan, my husband and I still decided to pay that off last due to the low rate and low monthly payment – but it was good to know how little was actually going towards it and now I’m more determined to get this seemingy small unassuming money sucker! 🙂
Not all debt is bad.
If you were able to consolidate your student loans at a very low rate a few years ago, you should most definitely drag out the payments for as long as possible. Not only can you possibly qualify for student interest tax deductions, but the money might be able to earn you a better return overall in an interest bearing bank account.
It all depends on the consolidated interest rate you were able to get.
-Raymond
One reason NOT to consolidate Direct Loan is that if you can get a “structured fixed payment” for a fixed term of 15 years or so. After you makes the fixed payments for the 15 years and there’s still a balance, you can get the rest of the balance is forgiven.
Also, consolidation loans have a fixed rate based on their weighted average of their underlying loan’s interest rates, rounded up to the nearest 1/8th of a percentage point.
While it’s true, you could have gotten a low rate (~4%) a few years ago, that’s because the variable rate around there, now the interest rate is around ~6%, the consolidation fixed rate is gonna be around there.
(NOTE: Some consolidators give you incentive interest rate discounts to consolidate with them. RESEARCH WISELY!)
As mentioned by others, “reconsolidation” can only occur if you have another student loan that was not previously consolidated.
Student loan debt is the largest debt I have. I pay about $350 a month and I would love to pay more but I can’t afford it. I hate feeling like my money is going down the drain every month, since it doesn’t feel like I’m making a dent at all.
Melissa I totally feel your pain. I stupidly consolidated years ago when the interest rate was 7.75%. I had lots of credit problems at the time because I didn’t have a clue as to how to handle money. I really wish they’d taught me that before I agreed to a $40K loan. Here I am 10 years later and hovering at $30K (also paying about $350/mo). Ridiculous. No re-consolidation options for me, too, though my credit’s great now and I know I could do a personal loan. But I think that it would a) hurt my credit score and b) not be any cheaper. Any thoughts are so very welcome!
A few useful things to note (that were at least valid for me when I started repaying in June 2007): repayment starts when you drop below full-time, not when you graduate; having the monthly payment deducted automatically by the dept of Education from your bank account reduces your interest rate (mine by 0.25%).
Interesting discussion…in college I opted for a bit of a different route. I’d racked up $6,000 in student loans after my sohpomore year of college and wasn’t too pleased with the direction I was heading, so I worked… a lot, and will be graduating debt free. That’s the way to do it!
I also consolidated way back when the interest rate was 8.25% and have over $100k in student loans and the payments are killing me. I have some friends who took out a home equity line of credit on their house at a lower interest rate to pay off student loans (and so the interest is tax deductible since we are over the income limit). What do you think? Good idea or not?
A couple of things to add…
We are paying off my husband’s grad school loans this year ($27,000). He was paying the minimum payment for a couple of years and when I took over the management of the payments we figured out that the minimum payment only covered the interest and he had made no dent in the loans for 2 years!! Said another way he never would have paid off the loans.
We are $8000 away from paying on his loans and paying off all our unsecured debts.
While I tend to agree that some debt is more worthwhile than other debt, I really think it’s too much to say “good” vs “bad” debt.
Yes, most people make more money with a degree than those without.
To my knowledge, most student loans are generally between 6-8ish%. Now, if we were shopping credit cards, that would be a fairly good, but not great rate. If someone was consolidating their credit card debt, they’d probably go for one with a lower amount.
I read once that paying an mere $15 extra per month could knock off *years* on a mortgage. I applied the same principle to paying off my student loan, and it’s worked wonders. I’ve put my student loan on “hold” a couple times (being unemployed, travelling), for perhaps a total of a year. Even with that, I’m on track to pay off my loan a few years early.
It doesn’t matter if you only pay $10 or 25/month more — even a little bit makes a huge difference over the long haul, and an amount that small is not likely (it shouldn’t be, anyway) to have a large impact on one’s monthly budget. Most people could save this much in pocket change each month.
I just don’t feel comfortable with saying that student debt is “good” and that someone therefore does not need to try to pay it off more quickly. Wouldn’t the money saved in interest allow for quicker financial freedom and ability to invest more??
The other plus to paying extra is that once you reach a certain point (at least with Direct loans), you may find that you don’t have a payment due the next month. In addition, if I pay more than $20 or so extra for a few months, my minimum payment generally goes down.
I really like the idea that someone else said that a student loan debt is like a mortgage on your life.
Here’s a related question that just appeared on Ask Metafilter today:
What happens when you don’t pay your (Canadian) student loans?
“(But if you die, they are forgiven.) If your best shot of getting out of your loans is death, you probably should start working on a plan to repay them.”
Heh. My wife used to have the job of verifying that student loan debtors were really dead. The process was about one step removed from the idea of the principal in Ferris Bueller’s Day Off. “That’s right–you show me a body …”
Hadn’t thought about that in ages. Not one of her favorite jobs.
Here’s another related AskMetafilter question:
I defaulted on my student loans and I want to know the best way to pay them back.
God, I always hear people talk about how student loans are “good” debts to have, but they sure aren’t good debts when you’re trying to repay $62k in private loans through the Great Satan, Sallie Mae. My minimum payments are a hair under $600 a month. They’ve been an anchor around my neck since I started paying them four years ago. No, I don’t even have anything productive to say. I just get so mad.
This has been a biggie for us as well. We (my husband and I) each consolidated our loans and they are fixed at 4%. We each have $30K in debt. We set them up in a graduated repayment schedule for 20 years. I am really conflicted on the payoff strategy. We could pay them off within 5 years. Do we do that just to get rid of the debt and not have it over our heads psychologically? Or, do we just save that money and know, hey we have $X in student loans but we also have much more than that in savings so overall our networth is still very positive? I think right now we are going to take a middle of the road approach and plan a payoff of 10 years. We graduated for college at 28, so we have a later repayment start, and I just don’t like the idea of repaying student loans into my 40s.
I have the same dilemma as Emma. (I didn’t mean to rhyme, but what the heck.) My government loans are over $55,000 fixed at 3.65%. Conventional wisdom says to save my cash in a high-yield savings account and pay the minimum on my student loans. But I don’t like having that debt–I feel like it constrains me to stay in a job I don’t like. I also worry that I might be tempted to do something else with the cash if it’s just sitting there.
My own position is this: if a debt bothers you, pay it off. I don’t care how “good” the debt is — if it’s a strain on your psyche, it’s better off gone.
@ JACK – “I can’t sell you my law degree.”
That’s funny, because all the lawyers I know sell their law degree for $400/hour.
@SJean – “If you should pass away, private loans are passed to your next of kin.”
I *highly* doubt this, and would like to see a citation. At the very least, this is something that would definitely vary from state to state. In a “community property” state, the spouse *might* be on the hook for debt incurred going into the marriage, but there is no way as far as I know in any state to pass debt on to kin without them being a cosigner. Think about it. If that were true, the only risk involved with loaning money would be if the debtor was an only child who’s parents were deceased and had no children of their own.
Now, it would definitely reduce any inheritance for your children, and your executor would be legally required to pay your creditors first from your estate, but if you couldn’t pay your student loans off, something tells me you aren’t going to have much of an inheritance anyway.
I will dig up the site that said that and post it. It may not be correct and I apologize for that mistake. In fact, I should have edited it out myself since that site also claimed that private loan interest is not deductable from taxes (pretty sure it is). Sorry for the mistake. Still, the premise is correct I think–pay off those nasty private loans as a top priority (under cc debt).
Here it is:
http://www.studentloanconsolidator.com/consolidation/faq.php#8
Also, while I did say that mathmatically NOT paying them back quickly makes the most sense, I admit that I am paying mine off MUCh before the 20 year term. It’s just better for my mental health. 🙂
@SJean – It does say that on that site, but I still think that’s untrue. Private student loans are no different than private loans for any other reason. Have you ever heard someone say “It’s better not to get a car loan because if you die, your next of kin will have to take responsibility for it”?
I would contact that site, and call them out, but I’m afraid they will pester me about consolidating my loans again!
@SJean – Also, I’m not trying to be a hard-ass about that point. Your article was really great and really illustrates the options you have around student loans.
Its just that I have quite a bit of debt, and so do my relatives, and the thought of passing my debt on to them should anything happen to me or vice-versa is a little bit more than i can bear to think about.
@icup – No worries! I understand. Perhaps the intention of the statement in the website was that it would be taken out of your estate… I do agree that it is probably wrong. Sorry for propagating misinformation!
Great timing! Thanks for your article it was extremely informative. I just finished grad school with about $72k in debt which is actually less than I had planned since I graduated a year ahead of schedule (desperately grasping for the bright side). I was planning to consolidate but, thanks to your aricle, I am rethinking that. Not to mention the great advice and links in the comments. I might actually qualify for one of the loan forgiveness programs and I had never even heard of it!
Wonderful post. If people just were able to get more useful information like this, it would make the whole awful process of taking out loans so much easier.
The fact of the matter is, parents, college officials and student loan companies need to spend time talking to students about debt and how to make the most of the college experience for the least amount of money. Gone are the days when college is just an alternative to work. With the ridiculously skyrocketing cost of college, it is something that needs to be planned out.
To any student in school or about to enter, please take some time and get the info you need. There are so many resources on the web. Talk to your parents, get help, and think before you take out any loans.
Here are some good sites to check out:
FinAid.org
StudentLoanWatcher
Good Luck
My husband and I filed bankruptcy 4 years ago, we have 1 year left. I was told by our lawyers that we could not include my student loan in the bankruptcy, and would have to pay it back when the bankruptcy ended. I was fully prepared to do this. I have recently found out that we have a $5000.00 balance on our bankruptcy, and that balance is for my student loan. I need to know if it’s possible to not pay this student loan on my bankruptcy. We are paying $435.00 a month to the trustee, and my husbands income is $2080.00, I am in and out of temp jobs, we don’t have money for groceries, or utilities, unless we make a late mortgage payment, we can’t make ends meet due to the $435.00 payment, I didn’t mind the struggle when I knew the money was going towards our other debts which after 4 years of trustee payments are now paid off. But a student loan is something I can pay directly at $100.00 a month, the forced payment of $435.00 is crushing us.
1. Can my lawyer ask the trustee to end, complete, close…(not sure of the right wording) my bankruptcy, so that I can begin making payments to the student loan on my own, and end the $435.00 a month trustee payments?
2. With exception of the student loan, all my debts are now paid in full, thanks to the bankruptcy. But because of the student loan I have one year of $435.00 a month to go. What will happen if I simply stop making the trustee payments, since everything except the student loan is paid off.
We filed for bankruptcy to keep our house, as I had to quit my job when our son became chronically ill.
My lawyer tells me it’s best I pay the student loan in the bankruptcy, as I am not being charged interest or penalties on the student loan, but interest and penalties on a student loan won’t matter much if I have no where to live, as it’s a monthly struggle just to make our mortgage payment, whose defaulted debt is already paid off in the bankruptcy.
Please help!!!! My lawyer tells me what he thinks is best for me, I need to know what I can and can’t do, and then decide what is best for me. I’m meeting with him in the morning, and I know it will be a battle of what he thinks I should do, and what I can do.
Pseudo update to my post earlier:
We’re now debt free except the house. The student loans have a balance “Paid in Full” on my Direct Loans account.
The minimum payment each month was $538. We were making larger payments than that, but now we can use that $538 on anything we want. Its our money now, not the Direct Loan Service’s money.
Oh and to anyone talking about getting a ‘fixed’ payment over 15 years – here’s some food for thought. I paid $11,500 in just INTEREST payments because I fell for that kind of repayment plan. It is STUPID. Don’t do it! Just pay aggressively. Get extra jobs! Sell stuff! The government makes enough money off the people in taxes, don’t let them make more off student loans!
Great article, but I’m a lil confused.
“I can pay them… and more! Should I pay them back quickly?
The general advice on this is no, as long as the interest rate is low. This does make sense if you are investing the difference of what you can pay and what you are paying. By the math, you should hang on to them as long as the term allows.”
I don’t quite understand this theory. Can you elaborate please? I mean I got the part where you just pay minimum and use your extra money on hand to invest in stocks or roth in order to yield a higher return.
I graduated this year and have about 11K subsized loan consolidated at 2.8%. I can easily make extra payments, get rid of the entire loan in 3 years and take advantage of tax deduction at the same time. I am almost positive that in 3 years, my salary will be over the income limit to remain eligible for the tax benefits.
So my question is,
1, Should I still drag out the loan to a 10 year period and pay those $2500 interest over the life of my debt? How likely will my other investments offset this interest expense?
2, The way I look at it is – Principle you can’t do anything about it, but with interest you can. The faster you pay, the less you pay for this unnecessary interest expense. The tax savings you get out of your school loan is just about 30% of the total interest you pay during the taxable year. Does it really help? It’s like, if you spend $250 on interest a year for 10 years, you only pay $175 in reality. But in my situation, this tax benefit stops in 3 years. Tax savings we are talking about is only $225 out of $2500 of interest!
Please advise?
I’m pretty sure that forbearance doesn’t have any effect on your credit score. I track mine frequently and continued to do so when I went into official forbearance on my loans and my score didn’t change a bit. Actually I think it went up during that time…
Also, I was able to go into forbearance on my private loans.
My son graduated from law school a year ago, applies for jobs daily and still is not employed. He bought a house (bank repo) three years ago while in school and with the lousy housing market he still has no offers even at a reduced price. Student loan payments of over $1200 month are coming up next month. Where can he get help? Ideas??
Liz what is the website you said you published ?
Your Financial Planning group with your girlfriends to help talk out money issues, such as student loans. I didn’t see your link .
Shawna, as far as I know forebearance doesnt affect your credit score. This article seems to affirm this:
http://livesafely.org/financial-freedom/get-rid-of-student-debt-once-and-for-all/
and the gov’t site itself mentions it:
http://studentaid.ed.gov/students/attachments/siteresources/LoanForgivenessMarch18.pdf
Almost anyone can get a student loan these days. Whether they can pay for it is a different story. People these days need to be aware of what they are getting into before they do it. By the way, the other student aid resource out there for preparing your fafsa was http://www.fafsausa.com
FYI – my private loan rate is now HALF of my Federal Stafford loan rate! A lot has changed since 2007…
Not all this info is accurate. My forbearance has not affected my credit score. I guess it depends on the ocmpany.
Get as many scholarships as you can, and max out on your federal financial aid would be my advice. I still had to take out private student loans, but not that much because I also worked part-time. Get your info from sites that are not private student loan lenders (i.e. htt://fafsa.gov/ http://studentloansforcollege.org/ http://www.projectonstudentdebt.org, etc… and the other main ones).
I have found that minimizing my private student loans at all costs has really helped me.
If I was to inherit some money from a death in my family, can a outstanding student loan
be collected from the inheritance????
I just wanted to say that I have a private consolidation through Citi (studentloan.com) and I was granted forbearance due to economic hardship. I requested 6 months, and they gave me a year. Thankfully I found a new job quickly and continued to pay on it.
Not sure if this article might be outdated or just has erroneous info. But according to Nelnet, one of the biggest DoE federal loan holders, both forbearance and deferment get reported as “current” to the credit bureaus. They can’t confirm if that status would affect either positively or negatively one’s credit score, but they claimed both status get reported the same way. I was entering repayment next month, but because I qualify for IBR, Nelnet offered to put me under forbearance until the paperwork gets approved so I’m not hit with a huge minimal from the get go. I’m still going to try to pay over the forbearance just in case.
Be prepared 2 or 3 Jobs for quite some time if you got a degree in a not so lucrative field. I’m 33 and still have $30K to go. I literally live in the poor house.
Going into forbearance on your student loans does NOT impact your credit score. Defaulting does. Most lenders give you at least 6 months forbearance if you have a hardship–in addition to the 6 month grace period– after you graduate. If you just call the lender and say you can’t pay but you fully intend to when you get a job, they will usually find a way to get you a forbearance. This will not hurt your credit score. If you just simply stop paying or never start paying when the loan comes due, you default, which will hurt your credit score. The lender will then send the loan to collections and you’ll have debt collectors hassling you. Federal student loans comes with all kinds of protections and payment plans, income based repayment, graduated repayments, and student loan forgiveness if you take a government job. Some government jobs actually repay part of your loan for you. After 10 years of working in a government job, your loans are forgiven and the amount forgiven is not considered income for tax purposes. If you default, however, you will have a black mark on your record forever; you will never be able to buy a home; and the federal government will garnish your wages. I have plenty of friends in this situation and there generally is no getting out. Also, note the high rate of inflation and the erosion of purchasing power when deciding on your repayment plan. Finally, paying down student loans dutifully every month does wonders for your credit score.
I’m surprised an updated Student Loan Repayment Guide has not been posted (at least not that I’ve been able to find). It seems a lot has changed in the past 5 years, would be an interesting comparison to see how advice has changed between 2007 and 2012…