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Grads need sound plan to repay student loans

Graduates should know thbankruptcy won't wipe out student loan obligations.

Graduates should know that bankruptcy won't wipe out student loan obligations.

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Updated: May 3, 2013 12:14PM

Millions of college graduates are about to ask this question: Was it

worth it? And it's a question that students just entering college should

be asking as they start looking at taking out student loans to finance

their college degree.

It's not the education, or the college experience that's the issue.

It's how you will repay those student loans.

Today's college graduates enter a job market that has few jobs

available. Yet, within months of graduation, they must work out a plan

to repay the loans that made their degree possible. Those loans now look

like the worst deal they could have made, because many carry high fixed

rates of 6.8 percent, or more.

Even a fixed-rate 30-year mortgage would cost less than 5 percent

annual interest these days. Plus that mortgage interest is deductible.

And if your mortgage loan doesn't work out, you could always default.

But student loans stay with you for the rest of your life. Not even

bankruptcy can wipe out this obligation. And since the government has

guaranteed those loans, they will find a way to catch up with you.

Tough choices

The time to think about repayment is immediately after graduation.

If you don't make some decisions within six months of graduating, those

decisions will be made for you. Standard repayment on a federal student

loan provides level monthly payments that cover accruing interest and a

portion of principal. This program actually pays off your loans in the

shortest amount of time.

To get an idea of what those payments will be, go to www.Sallie

Mae. com and click on the "monthly loan payment calculator."

Most grads will be overwhelmed by the payment -- especially if they

haven't landed a job. For example, if you have $30,000 in student loans,

you'd have to pay as much as $345 every month for 10 years.

But there are ways to defer, extend, and otherwise lower that monthly

payment. Just be aware that the longer you take to repay the loan, the

more interest you will be paying. That can double or triple the amount

you'll repay over the long run.

The newest option is called IBR -- income-based repayment. You must

demonstrate financial hardship to qualify. It caps the bill at 15

percent of discretionary income. After 25 years, if the balance has not

been repaid, you may be eligible for forgiveness of the remaining

loan balance.

The most important thing to remember is that you should contact your

student loan lender immediately after graduation. You'll probably want

to consolidate your loans, but check all your options because subsidized

federal student loans carry different rates, and some may be lower than

the consolidation rate being offered.

For example, loans disbursed before July 1, 2008, may carry that

high, fixed 6.8 percent rate, but loans made for the year starting July

1, 2008, carry a 6 percent rate. And loans made after July 1, 2009, are

5.6 percent. New loans, disbursed after this coming July 1, carry a

fixed 4.5 percent rate.

All unsubsidized loans carry the fixed 6.8 percent rate! So be sure

to check carefully the rate that applies to your loan -- and the

consolidation rate. And note that PLUS loans made to parents carry a

floating rate, currently 3.28 percent.

Here are two Web sites that will help you understand your loan

repayment options:



Starting college? Warning!

For all those just starting down the road to student loans, here are

several warnings. The loan process has just changed -- cutting out the

bank lenders as middlemen. So you'll be working through your college

financial aid office to get loans directly from the federal government

student loan program.

If you've qualified, these federal loans are your best choice. If

your parents are going to help, they'll have to decide between a

home-equity loan or a PLUS loan, both of which carry floating interest

rates -- and could rise rapidly.

There are also many private student loan plans offered. Most carry

floating rates. And here's where the warning comes in. It's a strange

quirk that could cost you a fortune in the future. Make sure you

understand the "index" to which your floating rate loan is tied. Many

choose the LIBOR rate -- the London Interbank Offered Rate. Typically

that's about the same as U.S. Treasury bills, and they historically have

moved in tandem.

But now, with debt woes in Europe, LIBOR has moved sharply higher vs.

short-term U. S. Treasuries. And any loans tied to LIBOR will adjust

upward sharply, while those tied to either U.S. Treasury bills (or a

"cost of funds" index based on what banks are paying on savings

deposits) are likely to adjust downward.

Yes, it's exciting to head off to college. But make careful

borrowing choices now, or you'll be paying for your education, as well

as benefitting from it, for the rest of your life. That's the Savage


Terry Savage is a registered investment adviser and a co-host of

''Monsters and Money in the Morning'' on WBBM-Channel 2 from 5 to 7 a.m.


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