The Do’s and Don’ts of Student Loan Repayments
November 19, 2014My oldest child, Rachel, is a junior in high school, and while we enjoy having her around the house, we know that soon she’ll be looking into college. In case you haven’t looked lately, the average cost for a four-year in-state public institution is $9,139—and that’s just for tuition and fees! Over four years, that’s going to cost upwards of around $40,000. By itself that might not seem so bad, but when you consider that Rachel has three younger brothers, that price tag starts to look awfully daunting.
Needless to say, there’s a pretty good chance that Rachel will need to borrow some money in order to help pay for her education, and she is not alone. For the 2013-14 school year, over 21 million financial aid applications were filed. That means millions of households will be straddled with student loan debt following their college days. In fact, if you or a loved one finished school last May or June and you had to borrow money to make that possible, then you probably received a special “gift” from the student loan program recently – a bill! Unfortunately, this is one gift you can’t give back.
Here are seven things you should and should not do when it’s time to start repaying your student loans:
1. DON’T bury your head in the sand
Missed payments can lead to default, which trashes your credit rating and can make it hard to get a car loan and mortgage later in life. It can also lead to collections, wage garnishments, or losing your tax refund. If you can’t pay your student loan, contact your lender as soon as possible to discuss potential options.
2. DO determine which repayment plan makes sense for you
The standard 10-year plan will generally save you interest over time, but it may leave you with a payment you can’t afford. If that’s the case, then look into an extended or income-based repayment option.
3. DO know what kind of loan you have
Many federal loans have programs like those listed above, as well as deferment or forbearance if you have a hardship. If you work full-time in a public service job, you may also qualify for Public Service Loan Forgiveness.
4. DO look into loan consolidation
If you have private loans, you won’t have as many options as with the federal loan program, but you can look into consolidation options and see if you can get a lower rate and/or better terms. Be careful about consolidating loans of different types though, as this may disqualify you for some of the benefits mentioned earlier.
5. DO build a student loan repayment plan
If you can afford to pay extra on your student loans, consider putting all of it on the loan with the highest interest rate.rather than pay an equal amount to all outstanding loans. Then, once that loan is paid off, take the entire payment and apply it to the loan with the next highest interest rate loan. Using this strategy can save you money while reducing the amount of time until ALL of your student loans are paid off!
6. DON’T forget to claim the tax credits and deductions
Tuition and fees paid from loan proceeds can be used to claim educational tax credits, and most taxpayers can write off up to $2,500 in student loan interest deductions each year. To learn more about the tax benefits of education, check out IRS Publication 970.
7. DO think outside the box
Your current or future employer may offer loan repayment assistance so ask. Also, if you’ve ever been interested in the military, the Reserves and National Guard have loan repayment plans for some recruits.
As you look back on your time at the university, DON’T let problems paying your student loans be part of the picture. Stay on top of things, and consider the blessing of the real gift you received—a solid education!
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