Student Loans: How to Make Post-College Decisions
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:
- 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).
- You would like to streamline your payments.
- 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.
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.
Don't rush decisions. Consider the nuances of your situation, run the numbers, and see what's best for you.