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Staci

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Last week Barbara laid out a number of options for borrowers to extend or postpone student loan repayment — important information for new grads to have as they enter the real world. This is a topic that we get lots of questions on — probably second only to how to lower student loan interest rates.

But I'm going to play devil's advocate  here, because I think it's important for you to consider another perspective. I'm going to tell you not to take advantage of these options unless you absolutely have to.

Michelle Singletary, one of my most favorite and down-to-earth personal finance columnists with The Washington Post , had this to say about extended student loan repayment in a piece published on May 17, 2009:

But can I give you some hard but well-meaning advice if you're one of the many graduates saddled with student loans?

Instead of immediately opting for repayment plans that will stretch your payments out until you're in middle age, try to find other ways to handle this debt.

I know these are tough times. Nonetheless start your loan repayment as soon as possible, even if it means taking a second job, or a roommate (or two or three), or yes, dare I say, moving back home for several years.

You could handle this debt if you delay going on to graduate school, which would only pile on even more debt. If you are going to have trouble finding a job to make the monthly payments on your undergraduate debt, how in the world are you going to find employment to service tens of thousands more as a result of an advanced degree? Trust me, an advanced degree doesn't guarantee a big salary.

You don't get to buy a new car, an upgraded wardrobe, waste your money on liquor at happy hours, or take vacations until this debt is extinguished.

And don't look at me with that face. Only after you've exhaustively scanned your budget and cut every possible expense (such as deleting the texting option on your mobile phone) should you consider extended repayment options.

Tough love from Michelle, but her advice is spot-on. Here's how she ends her column:

I've met an incredible number of people -- too many -- who really could have paid their student loans under the standard payback period but because they didn't want to live frugally, saw their loan balances jump significantly over the years.

If you truly can't afford to fully pay what you owe, take advantage of the extra breathing room. But remember the more you delay, the more you may pay.

Something to think about.

Karen

Have you ever been in your favorite store with a cool new pair of jeans, a new t-shirt, and a slew of other clothes in hand, ready to pay when the cashier says, "If you open a store credit card account with us today you'll get 10% off your purchase?" At that moment you consider how great it would be to have a credit card at your favorite store — without having to pay for that $500 charge right away.

Before you decide to sign up for that store credit card, you might want to consider that typical annual percentage rates (APRs) on credit cards from a retail store are about 23%. Ouch!

If you are able to pay off your purchases right away, the percentage rate might not matter to you (just remember the possible effect on your credit). But, if you think that paying a little bit each month is more your style, you should see if the savings will be worth it. To do that, you'll need to know how your rate is calculated. 

Let's break down what a 10% savings at the register for a $500 purchase looks like in one month:

1. Figure your average daily balance.  Add balances each day (purchases minus payments) and divide that by the number of days in the billing period. We'll use 30 days for this example. Say you make no additional purchases or payments for the first 15 days, and then on day 16 you make a $50 payment and on day 21 you make a $75 purchase. So your balance was $500 days 1-15, $450 days 16-20, and $525 days 21-30.

Here's the math:
($500 x 15 days) + ($450 x 5 days) + ($525 x 10) = 15,000
15,000 divided by 30 days in the billing period = $500 average daily balance

2. Calculate the interest. After you have the average daily balance, you can find out how much interest you'll pay that first month. Take your APR divided by 12 to find out how much interest you're charged each month. Then take that number times your average daily balance.

   Here's the math:
   23% APR divided by 12 = Monthly rate of .019166
   .019166 x $500 = $9.58 interest charge

3. Was the savings worth it? Back to your original sale: You saved $50 at the register (10% of $500), but after a month on your store credit card, you owe $9.58 on the balance. That lowers your savings to $40 after the first month. And unless you pay off the remaining balance, those savings will continue to drop.

While I am an advocate of using credit when it makes sense, I'm highly in favor of knowing what my rates are and what it will cost me in the long run. It's easier to make better choices when you know exactly what that retail therapy  will cost.

Barbara

We all strive to be above average in some of the things we do. Scholars are hoping to surpass the average grades, athletes are striving for higher than average statistics, you get the picture.

Yet we tend to settle on being average in other arenas. And, yes, sometimes it's just fine to run with the pack as just your average Joe or Jane.  But there is one area that you should never find comfort in being average — your finances.

Why not? I can tell you from personal experience that finding comfort in being average can come back to bite you!

When I graduated from college, a little over $2,000 on a college credit card followed me into the real world. Now for someone who had a scholarship to cover college expenses that seems a bit high, right?

Well, here's the deal. Looking into some credit card facts  I kept hearing over and over that the average college student graduates with over $2,000 in credit card debt. So I thought, "What the heck?" If my counterparts are dealing with the same situation, I can charge a few things, too.

However, when we get stuck thinking that the debt is inevitable, we become less conscious of how much we are spending on things we don't really need. Part of that $2,000 on my credit card was for an iPod, and be sure that I whipped out the plastic for a pair of shoes or two (or three...).

So in the end, thinking average college debt was OK helped me develop some pretty bad spending habits. And unfortunately, those habits stuck with me until I started working for a bank and talking about financial education!

I challenge you to be better than average when it comes to your finances — both during college and after. Think twice about charging that sweatshirt at the campus bookstore. Resist ordering a pizza for dinner when you could use your pre-paid meal plan at the campus cafeteria.

Don't fall into the average trap with your student loans, either (the average for student loan debt is almost $20,000 ). Consider a part-time job to supplement your living expenses rather than taking out more student loans. Pay your interest during school to avoid capitalization.

Each tiny step will put you leaps and bounds in front of the students who settle for "average."

Rachel

A few years ago when I was a banker, a high school student came in looking for help. He was freaking out because he had overdrawn  his account again and his dad was going to take away his car. "You have to help me!" he pleaded.

Oh, to be in high school again and have the threat of your car being taken away. People, listen: Of all things to have your car taken away for, banking trouble should not be one of them. You got this. Here's what you can do.

1. Make sure you have overdraft protection set up. When you spend more than you have in your account and you have overdraft protection set up, money can be automatically transferred from your savings account or credit card to your checking account to cover whatever you bought. This transfer costs money but it's less than a full overdraft charge. But don't let it come to this. You still have to replenish your savings or pay off that charge to your credit card after the fact. Do what you can to prevent this from happening altogether.


2. Play a little money mind game with yourself. For most of us, if there is money in the account, we're going to spend it, right? And if you only have $5 left in your account until Friday and you really want that Red Bull , you are going to justify the purchase. Here's what I used to do: When I opened my checking account with $100, I considered my account at zero. I pretended that $100 = $0. That way I always had an emergency cushion. When I say pretended, I mean it. That $100 in my checking account was invisible to me. Very rarely did I let myself go below the $100 and when I did, it was usually for something "really important: the day before payday.


3. Set up a text message alert to send when you enter the danger zone. You can get a text you when your account gets down to a certain amount, whatever you designate.


4. When in doubt, send a text to check your balance. This way there is no guessing or assuming and you know exactly where you stand.


5. And of course, be sure you are logging in to online banking as often as you do Facebook.  Knowing what's up will help you stay out of trouble, at least with your bank account.

Barbara

One of the questions we Student LoanDown bloggers get asked frequently (through comments and our Ask the Expert tool) is, "Can I lower my student loan interest rate?"

Some folks are looking to lower their monthly payment because they're not able to afford it — others are just looking to decrease the total interest paid to their lender. Here's the information I usually pass on to those readers.

When student loan borrowers sign their promissory note  agreeing to pay back the loan, they also agree to the interest rate detailed in the contract. For some loans this will be fixed and for others it will be variable (a margin that is added to a base rate). For federal student loans made after July 1, 2006, the interest rate is fixed. Most private student loans have variable interest rates.

Your promissory note locks in the terms on your loan (including the interest rate or rate margin). You can't "refinance" a student loan the way you can with other consumer credit products, but there are options to possibly lower your current monthly payment, reduce your interest rate, or reduce the amount you pay over the life of the loan.

Quick tangent: For those of you still in school or just beginning to take out student loans, be proactive. Understand what you're borrowing at what rate, so you don't find yourself unable to make payments later. End tangent.

Now, let's talk about the options.

Consolidate: By consolidating your student loans, you may end up reducing your current monthly payment because you are likely extending your repayment period. However, that means you would end up paying more over the life of the loan if you continue paying just the required amount each month. But if you're looking for a little payment relief now and are willing to pay more (or make higher payments later to avoid accruing additional interest), consolidation could be the answer. Your best bet for federal student loan consolidation is through the Department of Education's Direct Loan Program. 

An added benefit of private student loan consolidation is a possible interest rate change. If your credit situation has improved since you took out your loan (or if you bring on a cosigner), you may qualify for a better interest rate than you previously had.

Pay off the debt: Some borrowers could consider using a different consumer loan (personal, home equity, etc., depending on assets) to pay off their student loan. This option has a couple big things to consider, though. You would lose several benefits of student loans like deferment and forbearance options, as well as the potential tax deduction.

Pay more: If what you're looking to do is accrue less interest, then the best solution is to pay more money each month toward your principal balance. Even just a little bit each month could add up to big savings over the life of your loan.

Get the debt forgiven: There are some programs that will forgive a certain amount of a student's debt. For example, there is a federal loan forgiveness option available to students working in public service. 

Use borrower benefits: Ask you lender if they offer any benefits that could reduce your interest rate. For example, some lenders offer a discount if you make your payment automatically.

What other questions do you have about your student loans?

Caroline

If you're a high school senior, all the realities of college are probably getting more real by the day. Specifically, the reality of how much college costs.  Starting now, you've got just a few short months to pull together the financing for your first year.

That doesn't mean it's time to panic. It's time to get to a Financial Aid Night, if you haven't already attended one.

What's a Financial Aid Night? It's an evening dedicated to providing information and answering your questions about getting financial aid for college. Typically your school will host it with help from a bank or other lending institution.

It's a great time to go with your parents (yes, be sure to bring them) and get a good understanding of the financial aid process. You also learn more about grants and scholarships that are available. The knowledge you'll gain will help you move forward confidently to get money for college.

How does it work? There will probably be a presentation about the financial aid process and the opportunity to pick up brochures and information about loans and scholarships. You might also have a chance to visit with a banker to learn more.

If you haven't seen notices for a Financial Aid Night at your school, check in with your guidance counselor about when one might be scheduled. If you're really in the dark about financial aid, it's important that you attend sooner than later — deadlines rule when it comes to getting money for college.

If you've already attended a Financial Aid Night, let us know how it went. Did you find it useful?

Editor's note: Over the next few months, The Student LoanDown will be running a series of posts focused especially on high school seniors. We'll be attempting to cover lots of topics of special interest to this group as they count down to graduation and get ready to head off to college.

Staci

Happy 2009! Have you made any New Year's resolutions? 

I'm not a particularly successful resolution-keeper. Last year, I vowed to eat healthier, and for six weeks it was nothing but oatmeal for breakfast, salads for lunch, and Lean Cuisine®  for dinner. By the time Valentine's Day rolled around, I felt so deprived that I consumed a two-pound box of See's Candies®  in one sitting.

All bets — and subsequently, all resolutions — were off.

Looking back on it, I know my resolution was too general — not to mention highly unrealistic! I'm guessing that many resolution-makers find themselves in similar situations.

Depending on what stage you are in your student life — soon-to-be-student, current student, recent graduate — here are a couple of specific, achievable New Year's resolutions you could adopt in 2009:

1. Apply for at least one scholarship. Remember, free money for college means less money you'll have to borrow, and plenty of scholarships are out there for those willing to do a little work. Find one that's right for you by checking with your high school guidance counselor, your college financial aid office, your employer (or your parents' employer), or a scholarship search.

2. Before you apply, read the fine print. Know exactly what you're getting into before you sign a credit card application or a student loan promissory note, because your signature indicates that you agree to the terms and conditions. Pay attention to interest rates, fees, grace periods, and repayment periods. If you don't understand anything, ask — before you sign.

3. Make an extra student loan payment. Student loans don't have prepayment penalties. At least once this year, scrounge up enough cash to throw an extra $50 at one of your student loans, preferably the one with the highest interest rate. Just be sure to communicate with your lender and let them know exactly which loan you want the extra payment applied to.

My one resolution for 2009? Not to eat an entire box of See's Candies in one sitting. Sounds pretty doable, right?

Staci

Now that Thanksgiving is over, the holiday shopping season is in full swing.

I love to give. A Leo  by birth, I've always been a generous soul. So throughout the year I listen for cues from my family and friends about their wants and interests, find the perfect gifts, wrap them beautifully, and enjoy everyone's reactions at opening time.

Usually, I go a little, well, overboard.

This year is different. I've moved into a new home but haven't yet sold the other. And with two mortgages and two sets of utility bills to pay, my usual gift-giving practices won't be possible. Reluctantly I've had to adjust both my spending habits and my own expectations.

However, I didn't want to give up gifts entirely. After frank discussions with my family members, we agreed on a gift exchange compromise — a Yankee Swap.  We've done this for a number of years at our office holiday gathering with great success.

Our family has set a $25 limit for the swap. My mom is really getting into it, trying to think of gifts that we would all want to steal from each other, because that's where the real fun is. My younger sister, who won't be able to come home for Christmas this year, is mad that she's going to miss it.

"Can't I participate by phone?" she whined at Thanksgiving.

Anyway, it's not buy nothing, and it's somewhat frugal, but I think it's going to work out just fine. We might even start a new family holiday tradition!

If you're a conflicted giver like me, how are you adjusting your holiday gift plans this year?

Staci

Last week I was talking with a friend of mine who is still paying off his student loans from graduate school. Like he does with his car loan and his mortgage, he pays more than the minimum amount. The extra money goes toward the principal (the balance owed on the loan), which means he pays the loan off faster and with less interest . If this is something you can afford, I highly recommend it, especially since student loans don't have a prepayment penalty .

However, my friend's student loan servicer was recently purchased by another company, and now he's dealing with a different billing system.

Before, he used a loan coupon book  and mailed in his more-than-the-minimum payment every month. When he called the new company to ask about payment options, the representative looked at his account and said, "You're paid ahead through April, so you don't have to make any payments until then."

Then he asked for a bill, and the representative explained that he wouldn't be receiving one until his next payment was due — in April.

To be fair, I suppose most student loan companies aren't used to their customers inquiring about paying more and paying in advance!

What I recommended to my friend is that he set up a recurring automatic payment for his student loan through his checking account.

When he balked, I told him to think of automatic payments as an "electronic coupon book."  That way, he won't have to rely on receiving a bill — he can just take matters into his own hands. Plus, he'll be saving paper and stamps!

What works best for you to stay ahead — or at least on top of — your student loan payments?

Staci

It's October, my all-time favorite month! Golden leaves are falling, the air is crisp, and Halloween candy lines the shelves of every big-box store. Usually I'm breaking out the sweaters and baking up a storm, giddy with all autumn has to offer.

This year, though, the autumn mood feels far more somber. With the $700 billion Wall Street bailout plan  on everyone's minds, a lot of scary words have been thrown around:

Crippling financial crisis.
Unemployment.
Recession.
Depression.

So instead of enjoying the fall season, I'm watching my retirement account plummet and stressing about soon having to make two mortgage payments. That's right — two. Earlier in the year, I took a leap of faith and built a new home. Since then, the economy hasn't exactly cooperated. My current home hasn't sold yet, and my new home is scheduled to be finished in just a few short weeks. I'm not regretting the decision to build, but as I watch my assets fall and my debt rise, I am pretty worried about my finances.

If you're in college, the idea of retirement savings and two mortgages probably feels very far away, but I'll bet you have financial concerns of your own. Feel like telling us what they are?