Student Loans: How to Make Post-College Decisions

by Julie Rains on 8 February 2011 5 comments
Photo: EAWB

Making decisions about student loans doesn’t have to be difficult. The biggest challenge is abandoning the idea of one-size-fits-all advice. Why? The first 10 years after college graduation (a common repayment time frame) are often the most financially volatile times of your life. Plus, the type of student loan — federal vs. private, its interest rate, features, etc. — will influence your decisions.

Any advice, then, should recognize these nuances and serve as the starting point for making moves to pay off student loans, start saving for retirement, and more.

I asked Carrie Schwab-Pomerantz, CFP, president of Charles Schwab Foundation, and financial-literacy advocate, for her take on making such decisions.

Should I be in a hurry to pay off loans?

Not necessarily. If you can easily afford to accelerate your payments, that’s great. But you have to compare the interest rate you are paying on your loan to the amount of money you could make in a savings account or investment.

Also, student loan debt shouldn’t ding your credit rating the same way as credit card debt, provided you never go into default."

If you would decide to make prepayments to accelerate the payoff, make sure that extra amounts included with your monthly payment are applied to the principal.

According to credit-rating agency Experian, student loans are included on credit reports but do not have a “negative effect on your ability to get new credit.”

Can I have my student loans forgiven?

In some cases federal loans can be either partially or completely forgiven. For example, Stafford loans may be forgiven if you perform volunteer work, military service, or perform public service. See FinAid for details. Likewise, your payments may be reduced by another federal income-based repayment program; see IBRinfo.org for details."

Also, check out Loan Forgiveness for Public Service Employees (PDF), loan cancellation for public-school teachers, and Public Service Loan Forgiveness Program on the Department of Education's Federal Student Aid website.

Should I consolidate my student loans?

Consolidation can make a lot of sense if:

  1. You’re finding it extremely difficult to make the minimum payment. If you consolidate into a new loan, you may be able to lower your interest rate and/or extend the term of your loan — both of which will lower your monthly minimum (but beware: you may be paying more in the long run).
  2. You would like to streamline your payments.
  3. You can lower your overall interest rate.

Note, however, that you will likely not be able to combine federal and private loans into one.”

If you have a federal loan, check out information on Loan Consolidation, including the pros and cons of the Income-Based Repayment Plans. Pay attention to the treatment of interest-rate subsidies (relevant to Stafford Subsidized loans, Direct Subsidized Loans, and Perkins Loans) and other features associated with your current loans.

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Should I marry someone who still has student loans?

Of course financial responsibility is an important concern in any relationship, but carrying student loan debt is both common and often necessary — and by itself not a sign of irresponsibility.

Before you get married, however, the two of you should discuss how you plan to pay off the debt — either individually or as a couple."

For tactics on handling student loans before and after the wedding, see Carrie's response to a reader on Marrying Debt.

Should I pay off my student loans instead of saving for retirement?

This completely depends on the situation. You should never allow your student loans to go into default, so if you have to choose between paying the minimum on your student loan and contributing to your retirement account, make your loan payment.

After that, it depends on the interest rate you’re being charged on your student loans. Most student loan rates are pretty reasonable (if not, you may be able to consolidate into a new loan with a lower rate). If you can afford to sock some money away for retirement at the same time that you’re paying off your student loans, that’s ideal.

And if the company you work for offers a 401(k) plan with a matching contribution, you should try to contribute enough to the plan to capture the company match. Even a small retirement contribution every year over a long time will add up.”

Consequences for default include wage garnishment and loss of ineligibility for federal loans, such FHA loans or new student loans.

You can possibly reduce your tax liability by funding retirement accounts, paying interest on student loans, or both.

Don't rush decisions. Consider the nuances of your situation, run the numbers, and see what's best for you.

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Guest's picture

You also need to look at the intangibles related to the decision at hand. The most important being how important is it to have that debt payment out of your hair. My ex-roommate spent the first five years of his post-grad working to eliminate his loans. He admitted later that he didn't 'need' to and that the rates weren't that bad, but that he simply hated the idea of owing that money and so it was important for him to get rid of it. He could have invested it, or at the time even put it in a high yield money market (they were paying around 6% back then), but he wouldn't have had the same level of happiness and comfort as he did knowing that he was able to pay them off early. I think each person needs to ask themselves what level of importance it is to have a zero balance and take that into consideration as well.

Julie Rains's picture

I agree -- it can be so difficult to quantify or articulate why the early payoff makes sense for some people, even if the calculations indicate saving could be a better choice in terms of numbers.

Deciding on the student-loan game plan (based on an informed decision) and staying the course demonstrates financial discipline.

Guest's picture
Jeff

I agree, I spent the first 6 months of my career living with my parents(well I still do) and quickly repaid all of my student loans. In hindsight, my Roth IRA (Vanguard Total Stock) returned about 10% during those 6 months which blows the student loan rate out of the water. But now I'm debt free and that makes me very happy.

Guest's picture
Marie

I am also living at home so I can pay off my loans. Even with very aggressive payments, when I look at how much I have paid (over just a couple years!) in interest on top of my loans, it make me sick. I can't wait until I'm FREE!

Guest's picture

In my family, the people who really b**** and moan about other people getting entitlemen­ts were/are themselves the recipients of many programs including social security, medicare, GI bill education and housing purchase, mortgage guarantees­, students loans etc Those complainer­s tend to use more natural resources, generate more trash and pollution, and cheat more on their taxes but call me a hippie when I assert that we should all have healthcare­. And what's most appalling, is that the three most 'conservat­ive' people in my family have made a good part of their living from municipal or state jobs, or a corporate job where they were proud to admit they basically did nothing all day. All three of these people have, in the past 10 years, consumed over a million $ apiece in healthcare because of obesity and alcoholism­. The system is broken.