Question about student loan payoffs
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.
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