Shouldering the Debt Repaying Student Loans Requires a Little Homework
Skidmore, Sarah, The Florida Times Union
Byline: Sarah Skidmore, Times-Union business writer
You wanted to be a doctor or a lawyer or a teacher when you grew up. Well, now that you've received the education, it's time to pay the bill. What's the best way to do it?
Just as in cholesterol, in debt there are good types and bad types. Most financial planners say student loans are good debt. Those loans got you the degree that increases your earning potential. But that doesn't ease the sting when the bill shows up every month.
Upon graduation, the average undergraduate student owes $11,000 and an average graduate student owes more than $20,000, according to Mark Kantrowitz, author of several financial aid and college planning books and creator of financial aid information Web site finaid.com.
Because of the size of the debt, student loans can deter you from attaining financial goals such as home ownership or other aspirations such as furthering your education.
But even if you're bearing the burden of college debt well into your working years, you can still reach your goals. Taking advantage of recently reduced interest rates to consolidate loans, asking for deferrals of payment or discounts and taking a deduction on your taxes can all help balance the load.
Brittany Ellis, a law student at Florida Coastal School of Law, says she's starting to feel the pressure. She faces about $100,000 in student loans -- about average for law students -- when she graduates in May 2002.
"They say I am living better than I will after I graduate, which scares me because I am living on federal loans," she said. "Luckily the government works with you for your payments and makes it easier. But there's really nothing left over after that.
"It definitely puts everything else on the back burner."
Shawn Lindstrom, director of financial aid and scholarship services for Student Advantage and former assistant director of financial aid at Ithaca College, calls it the unfortunate reality of getting an education. In most cases, you've got to get loans, and in all cases, you've got to pay it back.
Simply not paying back student loans became popular in the 1980s, said Kantrowitz. Some students would just ignore them and declare bankruptcy to get out of debt. But laws created in 1998 to combat that trend made it nearly impossible to use this once popular option. Without proof of significant hardship, you are still responsible for student loan payment even after declaring bankruptcy.
Since you've got to pay it, pay it wisely, financial experts say.
ASSESS THE DAMAGE
Student loans can come from a variety of sources. So your first step in the battle is knowing your enemy.
Sit down with all that paperwork you've accumulated and find out who you owe and how much.
So if you haven't kept track -- start doing so. This information gives you the documentation you need to argue any errors, reach people for help, find out interest rates and other useful things.
Try contacting the financial aid office at your college or university if you have no records at all. Odds are if you owe someone money, they've been trying to find you and there is a record of it somewhere.
It may be confusing to determine whom you owe. Lenders will sell your loans to other providers but alert you of the change -- the latest records will show your current lender. In most cases, students borrow directly through federal government sources, not private lenders. But some students have loans from several sources to track.
When figuring the total debt, only add up the stuff that counts. Don't include balances you've already paid off or money you don't owe, such as grants or loans someone else took out for you.
In most cases, payments will begin six months after graduation, and payments may take as long as 30 years to complete.
Sotha Svay, 25, who is working full time as an administrative assistant, is putting off plans to buy a home until she finishes paying off her school loans.
"I don't want that hovering over me while I'm looking for a home or applying for a loan," Svay said. She has already paid off about $2,000 and still owes $5,000.
There are four payment methods to choose from for federal loans, and students agree to one of them before leaving school: standard, graduated, income-based and long-term payments. Each has different durations and monthly payments to make paying it back more feasible. If you decide after graduation another plan would suit you better, it is possible to switch plans.
If you are making multiple payments to different sources at high rates, then you might try the currently popular option of consolidating your loans because of the low interest rates. This can be done through the federal government for federal loans only or through other lenders. These are some of the lowest interest rates in the past 20 years.
"Right now the rates are so good, that I just consolidated my loans," said financial aid specialist Lindstrom of his own student loans.
Rates will vary according to loan type and lender. This is why you need to figure out who you owe.
The consolidation program for federal loans from the U.S. Department of Education grants an interest rate based on the weighted average rates of loans being consolidated. The rate is fixed and cannot exceed 8.25 percent. But many private lenders also offer low interest rates for personal and other loans at rates below 10 percent. If you originally borrowed from a private lender, odds are your rates are significantly higher and can benefit from the current situation.
The already low interest rates dropped another 1.5 percent, on average, since the tragedies of Sept. 11, said Kantrowitz. He said rates may continue to drop next year.
Consolidation isn't for everyone because student loans are often originally given at a generally low interest rate. But if you are having a hard time making several payments or simply have more than one loan at a high rate, experts say you may benefit from consolidation. It simplifies the payoff process and in some cases lowers total spending.
If you consolidate and make smaller payments, make sure it is necessary. Since you'd be paying less against the balance, it will take longer to pay off. Stretching out payments just to pay less monthly can mean the difference of several thousand dollars in accumulated interest. The remaining balance can hurt your debt-to-income ratio, the formula lenders use to judge your ability to pay back debt, and that could affect how much you can borrow in the future. While lenders generally are forgiving for student loans, if there is an unnecessarily high amount of debt it could limit car, home and other loan options down the road, Lindstrom said.
ASK FOR A DISCOUNT
If you're already doing everything right such as paying the bills on time and sometimes even ahead, lenders are willing to give you a financial pat on the head.
"There are so many new options out there for automatic payment and online payment," said Erin Love, a spokesperson for Sallie Mae Inc.
Lender Sallie Mae introduced a program this month that pays you cash for 3.3 percent of your original balance if you agree to automated payments and make your first 33 payments on time. For federal loans, you can receive a small discount for setting up automated payments.
And paying on time can be the key to other benefits. One of the worst things you can do is default, experts say. This can ruin your credit history and put your financial dreams off that much farther.
ASK FOR A BREAK
When trouble does come, and you find it difficult to make payments, ask your lender for help.
Many lenders will allow you to defer payments. If you defer, which means temporarily lowering or postponing your payments, you'll get up to three years to stabilize yourself before resuming payments. You have to contact your lender and show proof of difficulty paying to get a deferment.
But if you simply are having a hard time and can't prove it, look into a forbearance. This is a three-month break from a loan repayment for whatever reason. You make the request but your lender decides whether you deserve it.
Once you've actually paid, make sure to use whatever tax breaks possible relating to repayment. The IRS has several tax credit and deductions available relating to student loan payments.
For example, during the first 60 months that interest payments are required on your loan, up to $2,500 of the amount of interest paid can be deducted annually on your income tax return. Additionally, the Hope and Lifetime credits, which are several thousand worth of tax credits the government offers to offset the cost of paying for education, are available to current students or their parents. Other deduction options are available for use of savings bonds or deduction from an IRA to pay for higher education costs.
Read through IRS information to see which options apply.
HOW ABOUT ANOTHER?
So as if all this trouble wasn't enough, you are thinking about getting another student loan. Maybe you want to go back to school or are heading to undergraduate school for the first time. Or maybe you just want to understand what your friends are whining about? Regardless, make sure you know what you are getting into.
"A lot of people can't afford to go to school -- they have the desire but not the means," said Tami Kotopka, a nurse at Baptist Nassau Hospital and also a recipient of one of the company's educational scholarships. Kotopka had to consider not only her costs but the cost of her two children who are also in college when evaluating her decision to continue her education.
Think clearly about how much school will cost, how much you will owe and what your payments will be, Lindstrom said. Some students are choosing not to go to graduate school because of the cost.
"It's getting to be a bigger and bigger issue. Graduate students need to be sensitive about the career path they take," Lindstrom said. But everyone considering or handling student loans needs be aware of his or her options.
He added, "They just can't take out the loan and assume they'll be able to make the payments -- they'll end up not being able to feed themselves."
WHERE TO GO FOR MORE INFORMATION
Applications and program questions:
Federal government resources
All financial aid issues
Direct Consolidation Loan Program 1-800-557-7392
Sallie Mae 1-800-524-9100
or contact your bank or credit union
Repayment, deferment and forgiveness programs:
Department of Education
Department of Education www.ed.gov/offices/OSFAP/repayment/teachers
Teach for America www.teachforamerica.org/tfu
National Association for Public Interest Law www.napil.org
National Health Services Corp.
IRS tax breaks for loan repayment
Illustration: biz_studentLoanBurden 287589
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Shouldering the Debt Repaying Student Loans Requires a Little Homework. Contributors: Skidmore, Sarah - Author. Newspaper title: The Florida Times Union. Publication date: October 28, 2001. Page number: Not available. © 2007 The Florida Times-Union. COPYRIGHT 2001 Gale Group.