Question about student loan payoffs

By Stew

Some time ago, I received a question from a reader with a general question regarding college student loan payoffs. I recently paid off my own loan, but we are still working on Mrs. Stew’s subsidized student loan balance. Just in case you were wondering – she is worth every penny!

That said, I have a fair amount of experience in dealing with student loans. Here is the question:

I graduated May 01, 2010 and would like to know if you have any information on the best plan for paying off student loan or is their ways to get a portion of the loan forgiven.

Edna J——, Bachelor of Science

The first question is, are these private loans or government loans? There are not a lot of payoff options when it comes to private loans, because private banks are “for profit” enterprises. The lack of pressure to make a profit and the presence of tax payer subsidies allow government student loans to apply a great deal of payoff flexibility. For the purposes of my answers, I am going to assume that your question is in reference to government subsidized student loans.

When Mrs. Stew and I were struggling to sell our home in another state, I requested and was granted a student loan forbearance, meaning that my note holder, Sallie Mae allowed me to stop making payments for twelve months while we got our housing situation sorted out. In return, I agreed to make accelerated payments when the year of forbearance came to a close.

Government subsidized student loan providers also offer alternative payment plans where you are permitted to make a drastically reduced or even “interest only” payment for a limited time. The initial reduced payments look good at first, but the payments will eventually balloon later on. Furthermore, interest will still accrue during this time period. I advise people to avoid the alternate payment plans unless the interest rate on the note is extremely low or if they are in an extremely tight spot financially and the alternate payment option is a part of an overall debt reduction plan.

Federal student loans can also be deferred, meaning that the debtor can delay making payments on student loans. The most common deferment happens after graduation – typically you will not be compelled to start making payments until six months after graduation. There are other reasons for which a deferment can be granted: military service, continuing to go to school, unemployment, Peace Corps, temporary disability and more.

One more strategy for dealing with student loans is debt consolidation. Debt consolidation is just about always a bad idea in the long run, unless you are only combining school loans with school loans and you can reduce the average interest rate that you are paying on those loans. Many subsidized school loans come with variable interest rates, meaning that the interest rate changes from year to year. Debt consolidation will sometimes help a person permanently lock in a low interest rate. Your mailbox and inbox are probably full of student loan consolidation offers and it can make things easier. Be sure that you know your current interest rate and whether or not it is variable before you start to consider debt consolidation offers.

As for the question of student loan forgiveness, I am curious as to why a person would be seeking out this option so soon after graduation . . . You did intend to pay the loans back when you signed the papers, correct? We need to pay what we owe. That said, there are a few legitimate ways to obtain student loan forgiveness. Here are a few: bankruptcy, military service, teaching in a low-income school or volunteer for a government sponsored volunteer organization: Peace Corps, AmeriCorps, etc.

Edna, I do not really have enough information about your specific situation in order to give firm advice, however, I am just about always on the side of reducing debt as quickly as possible. Student loans should be treated like any other debt: take care of your expenses, be sure that you have an emergency fund and then pay as much as you can on your debt each month. Obviously, if you do not have a job yet, paying down debt is not your first financial priority. Furthermore, if you have other high-interest debt, the student loans will become a relatively low financial priority.

Photo by walknboston


6 Responses (including trackbacks) to “Question about student loan payoffs”

  1. Damsel Says:

    You mentioned the military a few times in your post, but *joining* the military is how we got my husband’s student loans paid off. He has an IT degree and struggled to find a job after the market started tanking in 2008. He joined the Army in the fall of 2009, and they are paying off $65,000 in student loans over the course of his four-year contract. His contract is for eight years total, but only four are required to be active duty. He can continue active duty for the other four, join the National Guard, or be IRR (Individual Ready Reserve). When we realized that the student loan repayment added almost $15,000/year to his salary (for the four years of active duty), we couldn’t turn it down. Initially, he had to turn down the GI Bill, but he can ask for it when he re-enlists, and then pass it to one of our kids if he doesn’t use it to get a higher-level degree.

    The military has been a HUGE blessing for us, in so many ways. We’ve experienced things we never would have otherwise – from living so close to NYC to strengthening our family and marriage bonds. We’ve decided that it will be a career for him – he can serve 20 years and retire with a full pension at 51!

  2. Stew Says:

    The military can be a great financial option . . . as long as you don’t catch a bullet in the head . . . ;)

  3. Damsel Says:

    Wow, Stew. I guess maybe you were trying to be funny, but… it’s really not. A little respect for those who HAVE caught “a bullet in the head” so that you can have your freedom might be more appropriate.

    Pretty sure you just lost a subscriber.

  4. Stew Says:

    Sorry, no disrespect intended. I am extremely thankful for the sacrifices made by our military in this area.

    My point was that joining the military in order to get rid of student loans needs to be balanced against the very real danger posed by military service.

  5. Candace Says:

    I knew what you meant didn’t find it disrespectful. Thanks for the post!

  6. Christine N. Says:

    Student loan debt is more difficult than other loans to get out of with bankruptcy. http://www.studentloanborrowerassistance.org/bankruptcy/

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