One thing you never
learned in school: how to pay for it. Educate yourself on the best ways to
reduce—or eliminate—student loans.
By Vera Gibbons
The most expensive college in the United States—Sarah
Lawrence College, in Bronxville, N.Y.—charges $44,220 a year for tuition. And
that doesn't include fees and room and board, which can cost an additional
$14,000. Even more disturbing is that the annual cost of a college education
has risen by 130% in the past 20 years, according to the College Board. As a
result, Americans have racked up about $1 trillion in education debt from both
federal and private student and parent loans.
"People are borrowing twice as much as they
were a decade ago because grants and scholarships are not keeping up with the
escalating costs of college," says Mark Kantrowitz, the publisher of
FinAid.org and FastWeb.com, free online financial-aid resources. To wit:
Graduates of the class of 2011 have an average of $27,200 in debt, up from
about $17,600 in 2001.
If you're on a tight budget, it may be difficult
to steer any additional cash toward education debt. But you should try to pay
it off as early as possible; otherwise it might stick around for a decade or
more, which could prevent you from saving enough for retirement. Here are five
steps to paying off any lingering loans of your own—and to helping your
children settle theirs down the road.
1. Pay off variable private
loans first.
If you or your recent grad has this type of
loan—which makes up 15% of total U.S. education debt—this may seem like an odd
move. After all, the interest rates on variable private loans (given by banks
and credit unions) are currently lower than the fixed rates on federally backed
and private loans. But historically this situation is unusual, and if the
economy improves, interest hikes are probable. "Rates could climb 5% to 6%
over the next four years, making your monthly burden unmanageable,"
Kantrowitz says.
If you can, pay twice the required amount until
you have eliminated this debt and make only the minimum monthly contribution
toward your fixed-rate federal loans, since those rates cannot increase.
2. Choose the right
repayment plan for federal student loans.
When it comes to Stafford, Perkins, PLUS, and
Direct Consolidation loans—which make up 85% of education debt—there are five
repayment options. They range from the standard plan, which requires a minimum
payment of $50 every month for up to 10 years, to the new, income-based plan
that caps your monthly payments at a "reasonable percentage" of your
income (determined by the federal government) and forgives any debt remaining
after 25 years. So which schedule is best for you?
"People often make the mistake of going
with the option that has the smallest monthly payment, which causes them to pay
thousands more in interest over the loan's life span," says Lauren Asher,
the president of the Institute for College Access & Success, a nonprofit
that works to make college more affordable. Aim to put 10% of your gross (that
is, pretax) income toward your education debt. Go to studentaid.ed.gov to
calculate which repayment plan fits your budget.
3. Ask your employer to pay
off your student loan.
A little-known way to eliminate college debt is
to appeal to your boss for a compensation package. "Some midsize companies
cannot pay the kinds of salaries that a large corporation can, but they may be
inclined to offer lower wages in exchange for a onetime payout toward your
loan," says Manuel Fabriquer, the president of College Planning ABC, a
consulting firm in San Jose, Calif. Why? "It costs them less in salary
payments in the long run." (Those in fields that require a special degree,
like tech, finance, and nursing, are most likely to receive this benefit.)
If you're a recent grad looking for a job, bring
this up during salary negotiations. Be willing to take a lower salary and to
commit to staying at the job for a specific time period in exchange for a
payment toward your schooling. If you're a veteran employee, raise the subject
at your annual review by saying, "I've been a loyal employee for [insert
time period], and I look forward to continuing to grow and learn here. As part
of my compensation, can you put [insert amount] toward my loan?"
4. Consider consolidation.
If you or your child graduated before July 1,
2006, it pays to roll multiple federal loans into one—you'll lock in an
interest rate that's lower than what you're paying on each separate loan.
Earned a diploma since then? All federal student loans now carry fixed interest
rates, so there's no financial benefit to consolidating. (And it's highly
unlikely that you'll be able to combine any variable private loans.) Nevertheless,
if you have trouble keeping track of payment deadlines and have been hit with
late fees on occasion, go ahead and consolidate. (For more information, go to
simpletuition.com or loanconsolidation.ed.gov.) You'll save some dough by doing
so.
5. Sign up for
auto-deductions.
You may have already realized that automatic
online loan payments make your life easier. What you may not know is that all
government and some private lenders charge a slightly lower interest rate
(usually 0.25% less) if you make your monthly remittance this way. Over 25
years of payments, you'll reduce your repayment period by at least a year, says
Reyna Gobel, the author of Graduation Debt. Best of all, you can sign up now,
even if you've been repaying your loans for years.
Contact Susan S. Lewis & Associates a Naperville Accounting firm for tax benefits resulting in college loan payments, or for Naperville Education Planning Services, contact Platinum Financial, the sister company of Susan S. Lewis Ltd.
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