Student Loans: Tips for Taking Them Out & Paying Them Off

October 20, 2014

There’s a reason student loan debt, and the concern about people being able to pay that debt off, is such a frequently discussed issue -- according to a recent report from credit reporting bureau Experian, 11 million more Americans carry at least one student loan today than did in 2008. That adds up to a whopping total of $1.2 trillion.

I happen to be one of those 40 million (I actually have two loans I pay every month) and I thought it would be helpful to look at some of the options for parents with kids just starting school, graduates, and folks who are considering going back to school later in life. (A quick note on that: according to the independent Government Accountability Office, the amount of college debt owed by seniors grew substantially between 2005 and 2010.)

Current or future students

If your student is still a long way off from college, consider CollegeInvest, a state-sponsored 529 savings plan specifically for families looking to save for college. It offers significant tax incentives to participants. Make sure you understand the risks and restrictions involved before beginning your account.

The first thing parents and their students need to consider when they’re applying for colleges is how much the total cost of their education will be. Any parent who has sent their child off to college recently knows how much costs for everything from tuition and textbooks to room and board have risen over the past decade, increasing more than five times more than inflation since the early 1980s.

Another important factor to keep in mind is what kind of degree program the student will be completing. Check out this list from Forbes for the average starting salaries for common college disciplines. While it shouldn’t limit what your student wants to study—after all graduating on time should always be an important factor—it can give you an idea of the kind of debt and the eventual monthly payments you should be willing to take on to get your undergrad degree. You can find more info about this by using the Occupational Outlook Handbook at the U.S. Department of Labor’s website.

On that note, consider what you can do to supplement your income while in school, conversely reducing your reliance on financial aid to pay for living expenses. Working a part-time job on weekends or evenings may not be the most entertaining way to spend your downtime during your college years, but your future financial self will likely be grateful you had the foresight not to rack up extra student loan, or worse, credit card debt, while in school.

Most importantly, know what type of loans you and/or your student are committing to before signing the promissory note. Here is a brief overview of the financial aid products available (you can read more about them by visiting the U.S. Department of Education’s website):

Subsidized loans: These are loans awarded to students who demonstrate financial need. They do not accrue interest while the student is enrolled at least half-time in school. The annual awards range from $3,500-$5,500.

Unsubsidized loans: These are loans provided by the U.S. government and any student is eligible to receive them regardless of financial need. Be aware that interest rates for these loans are about a third higher for graduate students than they are for undergrads. They can be as much as $20,500 depending on how much subsidized money a student receives, grade level, and whether or not the student is still claimed as a dependent by their parents. It’s important to remember these loans begin accruing interest immediately.

PLUS Loans: Unlike unsubsidized and subsidized loans (frequently referred to as Stafford Loans), the borrower might may end up being the parent rather than the student (although they are available to graduate and other students for whom traditional direct loans may not be available). There are a number of pitfalls associated with this type of loan, so be aware of all of the costs and limitations—for example, they don’t qualify for any repayment plans for those with income restrictions. Parents should also calculate what their total payment will end up being, including any existing loans from their own education.

Perkins Loans: Unlike Stafford Loans, these are financed by the educational institution rather than a bank or the government, and like subsidized Stafford Loans, they are only available to students who demonstrate a financial need for them. The interest rate is also a bit higher than Stafford Loans.

Private Loans: There are a number of education products offered by private financial institutions. These can have higher interest rates, as well as fees and other costs not typically associated with traditional student loans. They usually require a co-signer, and some can include using things like home equity or 401k as collateral. Experts say these types of loans should be considered a last resort, and they can potentially hurt your financial future, so be sure to weigh the costs, risks, and benefits before taking them on.

Recent graduates

First off, congratulations on completing your degree. Many recent college students either graduate much later than expected, or don’t finish their degrees at all, so it’s a big accomplishment. Now, here comes the hard part: paying back all those loans. The first step is determining who your loan servicer is (don’t worry, they will find a way to get in touch with you -- oh, and you don’t get to choose who services your loan), and creating a payment plan with them.

My servicer is a company called Nelnet, which currently services about $24 billion in Federal Student loans. I’ve found them to be a good company to work with, especially when I was having some trouble making payments. Most of these companies will work with you if the payment plan you come up with doesn’t end up making sense for your personal situation, but be aware that a lower payment now may mean more interest or a longer period of time paying loans off in the future.

Student loans are a unique type of debt because they are, generally speaking, one of the few types of debt that are unable to be forgiven due to a bankruptcy. In nearly all cases, you must pay down your student loan debt over time. However, there are a few ways to postpone or, in some cases, forgive them:

Deferment: In many cases, you can get your loan payments deferred for a limited period of time while you hunt for your first post-graduation job. For subsidized Stafford loans, interest will not accrue until the end of the deferment period, but for unsubsidized Stafford and PLUS loans, interest will accrue during the deferment period. It is possible to only pay the interest during this time. Visit the U.S. Department of Education’s website for a full list of qualifications for deferment.

Forbearance: This is essentially the same as deferment, but interest is charged on all loan types. Again, if you can afford it, it might make sense to pay the interest off during this time. Consider all of the financial implications of deferment and forbearance before committing to these plans. Check out the link above for more information about forbearance.

Forgiveness: For some folks who decide to enter into public service or the non-profit sector, the government has created programs allowing direct student loans (subsidized and unsubsidized Stafford loans, but not Perkins or FFEL loans) to be forgiven. Check out this Dime post from last year written by our resident legal expert, which covers some of the options available.