Grads need sound plan to repay student loans
BY TERRY SAVAGE Sun-Times Columnist Jun 7, 2010
Graduates should know that bankruptcy won't wipe out student loan obligations.
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.
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
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
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.