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Juggling student loans
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November 15, 2001: 1:52 p.m. ET
A beginner's guide to paying back college loans.
By Megan Kissin
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NEW YORK (CNNmoney) - Chris Kearney thought his homework days were behind him.
The recent graduate of Molloy College on Long Island, N.Y., spent four years tackling term papers and final exams -- all in the name of real world preparation. Somewhere along the way, however, he missed the class on managing student loans.
"I don't and didn't spend a lot of time with my loan situation," he admits.
Kearney, 23, now a regional sales assistant at John Wiley & Sons in Manhattan, is starting off his career nearly $10,000 in debt. Currently, he makes monthly payments on his low-interest loans based on his income, as recommended by his credit union.
He notes it's not difficult meeting those bills, but worries he didn't explore other payment options and therefore may not have secured the most favorable loan package.
His concerns are not without merit.
Without knowing the terms and conditions of all of the various loans available, "it's like playing a sport without knowing the basics," said Phillip Cook, a certified financial planner (CFP) with Cook & Associates in Torrance, Calif.
What's the 411?
According to Jane Glickman, a public affairs specialist with the U.S. Department of Education, the amount borrowed in Stafford student loans by the average college student was $14,982 from 1998 to 2001. The federal government allows borrowers a maximum of 10 years to pay off their debt. Consolidating loans can extend that period.
At present, the interest rate is set at 5.99 percent for federal Stafford loans. The rate changes every year on July 1, and Tina Christiansen with Northwest Education Loan Association in Seattle, Wash., says, "this is the lowest rates have been."
Set priorities
There's no one way to minimize the overall cost of repaying student loans, planners say. But most agree the key to financial freedom is budgeting.
It is imperative for borrowers to prioritize. This includes weighing overall income against the total amount of expenses and sometimes requires cutting back. Christiansen urges grads to "look at all expenses and set up a money-managing plan...[and diagram] what's going in and going out."
A few additional things to consider:
- Gather all the documents regarding loans; recover lost documents from the lender.
- Determine the number of loans taken out; multiple Stafford loans from the same lender are combined into one loan.
- Know when loan payments begin; keep in mind the grace period. Borrowers are required to repay loans after the grace period, which is usually six months after graduation or withdrawing from school. The federal government pays interest on subsidized Stafford loans, or need-based loans, while the borrower is enrolled in school, at least part-time, during the grace period and during deferment period. Unsubsidized Stafford loans are not based on need and the borrower is responsible for paying the interest accrued while in school, with the option of postponing payments until after graduation.
- Create an overall expense plan based on both income and expenditures - current and future.
- Set repayment goals; consider options.
- Keep in touch with the lender and service provider; update records.
Once your records are in place, look to reduce costs.
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It's like playing a sport without knowing the basics.
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Phillip Cook
Cook & Associates
Torrance, Calif. |
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The primary objective for any borrower is to repay as much as possible in the shortest period of time, thereby keeping interest payments to a minimum. Ideally, students should avoid deferment (postponement of principal loan payments) and forbearance (suspension or reduction of principal payments), as these options cause additional interest to accrue, with the exception of subsidized loans under a deferment plan.
Keep in mind that the interest you pay on most federal loans is tax-deductible. If you're trying to determine which loans to pay off first after you land a job, including credit card bills, car loans and college debt, financial planners say your low interest and deductible student loans should come last.
Also, if the student is employed, disregard any grace period and dive right into the repayment schedule - especially if interest rates are low. Remember that for Stafford loans, interest rates change annually but cannot rise above 8.25 percent.
Finally, explore repayment options. Lenders provide several methods of payment. With standard payments, borrowers pay the same monthly amount for the entire period of the loan. Under the income-sensitive plan, lenders determine payments according to annual income. Borrowers, then, can pay more than the minimum as their salary climbs, shortening the length of the loan.
Click here for a look at more college tips
Then there's the alternative of consolidating. It's best to consolidate when rates are low (as they are today), when you cannot meet your existing monthly payments and when you've got more than one loan outstanding.
In many cases, moving them all into one lump-sum loan yields a lower interest rate in comparison to paying off each one individually. A compact one-month bill on all outstanding loans has a fixed interest rate and may be necessary to lower monthly payments. But make sure you do the math. Planners say it's likely to extend the term of your loan and a result, add to the cost.
While it's important to pay off your debt on time, you shouldn't fall all over yourself trying to pay it off early. If you score a job that pays big bucks or suddenly come into some cash, Scott Kahan, president of Financial Asset Management in New York, said it's better to keep up with your regular loan payments and put that money to work for you in a tax-deferred 401(k) or IRA. Interest-bearing accounts, such as savings accounts or money market funds, do the trick as well. 
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