Managing Student Debt

Managing Student Loan Debt

By James M. Taylor

As costs for higher education continue to rise, so does the demand for student loans and other financial assistance. Student loan debt in the Unites States currently exceeds $1 trillion and continues to rise, while parents, students and new graduates grapple with the best strategies to address college debts.

Planning is vital, whether doing so for potential loans, balancing family priorities or managing existing student debt. What are the key considerations?

– Do your research. Learn as much as you can about available funding options. This includes all sources of financial aid such as scholarships, grants and work study, as well as various student loan options. Research costs for all colleges or programs under consideration. Visit the Free Application for Federal Student Assistance (FAFSA) website (www.fafsa.ed.gov) for information and to fill out the required annual form. Another resource is American Student Assistance (www.asa.org). Assess individual and family capacity to contribute through savings and current income. Examine the cost benefit of debt vs. earnings potential in your field of study. Discuss your situation with your financial advisor and loan counselor.

– Have a plan. Develop a comprehensive budget for all college expenses along with anticipated loan needs while in school, as well as projections for salary, living expenses and other liabilities after graduation. Realistically evaluate individual capacity for debt repayment during those first years in the workforce. Don't take on more debt than necessary, even if you qualify for a higher amount.

– Understand student loan types. Evaluate the available types that you qualify for and the impact that interest plays during the loan's lifetime. Use loans first that are subsidized and carry the lowest interest rates. Then, supplement as needed with the higher-rate loans, which should also be the first paid off.

o Stafford loans – The most common federal student loans, Stafford loans can be "subsidized," which means the government subsidizes interest payments until repayment begins, and are for students demonstrating financial need; or, "unsubsidized," which means interest begins accruing immediately.

o Perkins loans – For students with exceptional financial need, these are low-interest federal loans lent directly from the school.

o PLUS loans – These loans cover expenses not covered by other federal financial aid, and are usually taken out by parents or graduate students.

o Institutional loans – These are loans to students from schools using non-federal aid.

o Private loans – Private loans are obtained through private lenders to help students who are ineligible for aid or do not receive a sufficient amount of federal aid to cover costs.

– Understand loan terms – Carefully evaluate the loan terms. Typically, six months after a student stops taking courses at least half-time, federal student loan bills start coming due. However, interest usually begins accruing from the time the first loan funds were dispersed. The most common repayment options include:

o Standard repayment – This is the default plan for loan payback, requiring a fixed amount each month for 10 years based on principle and interest.

o Graduated repayment – These plans address lower earning capacity at the beginning of a career by allowing lower payments in the early years, which rise over the 10-year repayment period. Earlier payments under this plan are often interest-only .

o Income – based repayment – These plans cap eligible students' payments based on earnings which makes payments more proportional to income. In 2012, the maximum is 15 percent of disposable income. In certain cases, such as for public servants, limited loan forgiveness may be allowed after 120 on time payments (10 years).

o Extended repayment plans – It is possible to extend repayment period from 10 to as many as 25 years, which allows for lower loan payments. However, interest will accrue for a longer period and increase overall repayment costs.

o Loan consolidation – Consolidating multiple student loans may help lower payments.

– Avoid default and delinquency. Consider deferments or forbearance if you to need to adjust or suspend payments temporarily. In some cases, it may be possible to modify repayment plans. If circumstances impact ability to make timely payments, communicate immediately with your student loan representative to explore options.

– Should student loans be paid off early? Paying down high interest rate debt as soon as possible is usually a priority. Also, analyze how the rate of your student loan debt compares to other debt (home, auto, credit card). Consult a financial advisor to discuss how your student loan debt payments fit in with your overall financial plan.

James M. Taylor, CPA, CFP, is a tax manager at Dennis, Gartland & Niergarth. For more information, contact jtaylor@dgncpa.com or 231.946.1722.

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