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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.

Barbara

Folks, we've made it through another graduation season. The gowns and mortar boards are packed away, and now many graduates are focused on their finances during the first months out of college. Student loan repayment is just down the road.

As you look ahead to that first student loan payment, you may be realizing that it's going to be a little tough to swing. You may have borrowed more than you can afford to repay or may not have secured employment quite yet. (Side note for those of you just starting to take out student loans: Make sure you budget properly so you don't borrow more than you can repay.)

Whatever your situation, there are options available to help make it easier to pay your student loan. Here are some ways you may be able to lower your interest rate or monthly payments:

• Choose a different repayment plan. For federal loans, there are a number of repayment plans other than the standard repayment plan. You may be able to have your payment based on your income, extend your repayment if you have over $25,000 in federal loans, or start out with smaller payments that gradually get larger over the repayment term. And check with your lender to see what repayment options are available for your private student loans.
• Take advantage of discounts from you lender. Ask your lender if there are any interest rate discounts available for your loan. For example, you may be able to save money if you have your monthly student loan payment automatically deducted from your checking or savings account.
• Consolidate your loans. By combining your federal student loans  together into a new loan with a longer repayment period, you'll usually lower your monthly payment. For private student loans you may even find that your interest rate is lower if your credit situation has improved or if you bring on a cosigner with excellent credit.

Remember that if you're lowering your monthly payment by extending your repayment period or paying just the interest, you may end up paying more interest over the life of your loan. However, in the grand scheme of things, if it prevents you from missing payments and defaulting on your student loan, it might be worth it.

Looking for a way to postpone your student loan payment? We'll talk about deferments and forbearances later this week, so stay tuned!

Meanwhile, hit me up with any questions you have about different repayment options.

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

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?

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?

Barbara

Recent grads, have you made your first student loan payment?

If not, it's coming. The six-month grace period of Federal Stafford Loans is ending for May graduates, which means it's time to repay.

Here are a few ideas to start your repayment off the right way:

1. Pay on time. One of the best things you can do to build your credit history and stay on good terms with your lender is to make on-time payments. Stay on top of due dates by managing your loan online. You can even make it simpler by signing up for automatic payments.

2. Pay more. A little extra can go a long way when it comes to saving money over time. Each dollar you pay in addition to your minimum payment means one less dollar to pay interest on. The savings can really add up.

3. Consolidate. If you want to make one student loan payment to one lender instead of several, you can consolidate your federal student loans through the government  and private student loans through lenders like Wells Fargo. Plus, there's an added bonus to private student loan consolidation: You may qualify for a better rate than you had on previous loans if your situation has changed.

4. Talk with your lender. We know some borrowers may have trouble repaying. The important thing is that you talk to your lender about your options. You may qualify for a deferment or forbearance. Or you may be able to pay on an income-sensitive, graduated, or extended schedule.

For those of you already repaying your student loans, what tips do you have on starting repayment on the right foot?

Staci

Not long ago I read an article that made me cringe: A graduate student at California State University, Northridge  decided to put her tuition on a credit card.

On her credit card? With all the other options out there? [Gasp.]

Although Jennifer didn't put her tuition on her credit card, she did charge some of her living expenses, which left her in a bit of a bind. Here's the final part of her story.

Mistake #3. Living on Credit — Not Taking out Enough Money in Loans to Cover Living Expenses

When I went away to college, my mother made a deal with me. She would give me an allowance of $200 every two weeks for living expenses (basically all she could afford). She also got me a credit card. Six years later, we still have the same deal and the same credit card.

When I took out loans, I only borrowed enough money to cover tuition costs and my rent. As it turns out, that $200 every two weeks hasn't been enough to live on, and I now have a standing balance on my credit card that I can't pay off.. Very recently a wise financial advisor pointed out to me that the nearly 18% interest rate that I pay on my credit card balance exceeds the interest rate of my student loans. Neither my mother nor I thought that it might be a good idea to budget living expenses into my student loans even though she's encouraged me to keep putting the larger, unusual purchases on my credit card.

Now that we've learned out lesson, my credit card will be paid off this fall before I start my new grad program. I've taken out extra money for my living expenses and I'm going to try something new once I'm established at school: My credit card is going in the pencil box that I bury in the bottom of my desk drawer, and I plan to withdraw a budgeted amount of cash every week.  The objective will be to live “cash to mouth,” or to make the cash last the whole week, without running out — groceries, coffee, everything. Any extra cash will go into a reward fund that I will utilize at graduation, one year from this September.

While the economy is increasingly digital, and more merchants can handle small $2.00 coffee transactions digitally, stick to cash because it's tangible. It's easier to see how the coffee adds up when you're making change and not just handing over a thin slab of plastic.

How many times have I heard that little gem of wisdom before? Lots. But there's no teacher like experience.

Jennifer's right — there's no teacher like experience. But perhaps the mistakes she made (or almost made) can help you avoid some financial pitfalls of your own.

Want to tell your student loan story? Have any wisdom to share about your own financial experiences? Send us an email — we'd love to hear from you!

Staci

Generally, Wells Fargo recommends that students exhaust all of their "free money" (such as grants and scholarships) first, then borrow federal student loans, and if they need additional funds, consider private student loans .

Graduate student Jennifer weighs the pros and cons of that borrowing strategy in her next segment.

Mistake #2: Not Considering a Private Loan over a Federal PLUS Loan for Graduate Students

When taking out my loan for grad school, I decided that I had better do my research this time. As a grad student, I now qualify for federally subsidized loans. Stafford loans only go so far, and to finance the shortfall, my options are either a Federal PLUS Loan for graduate students or a private loan. A Federal PLUS Loan for graduate students has a fixed interest rate, so of course, this is the best option. But is it really?

The terms for the two loans differ: PLUS loans have a ten-year repayment term, which can be extended with broad deferment options (including one that covers insufficient salary), and a fixed government rate of 8.5%. Private loans have a longer repayment term — up to 25 years depending upon the lender — and relatively narrower deferment options. The interest rate on private loans is based on the Prime Rate  (which is the federal funds rate plus 300 basis points, or 3%), plus a margin (one or more percentage points) based on your credit history.

Now, here's the kicker: for a private loan, the Prime Rate, plus a percentage point or two, may yield an interest rate lower than the Federal PLUS Loan if you have a good credit history. However, choosing a private loan is a gamble. The economy is currently in pretty bad shape, and the Fed has been keeping interest rates low, but inflation is also a risk — it may lead to the Fed raising interest rates in the future. The Prime Rate has ranged from 4 to 9.5% since 2000 and currently sits at 5%. Banks calculate the applicable Prime Rate differently. For example, banks can use the monthly average, yearly average, or the rate on the final day of each month. If you're going to go with the private loan, make certain that you know how your lender will calculate the interest rate.

A private loan may be the way to go if your career path is more certain and you have a good idea of what your salary will be upon graduation — i.e., you don't actually need the longer repayment term, and you can repay the loan sooner before economic conditions change too drastically and take advantage of a relatively certain lower rate of interest. But again, this is a gamble. It might be smarter to go with a Federal PLUS loan if you tend to procrastinate or think that you'll need to utilize the relatively broader repayment deferment options.

Ultimately, it comes down to this: You have to do what's best for your own financial situation, and what might work for one student might be completely wrong for another. So do as Jennifer did — if you need to take out a student loan, weigh your options, weigh your individual tolerance for risk, and after educating yourself, borrow accordingly.

We'll have Jennifer's last piece of advice on Thursday.

Staci

As we commemorate the second anniversary of the Student LoanDown — how can it be two years already? — I'm reminded of why we started blogging in the first place: To have a conversation about education financing.

Although we bloggers tell you about our experiences, it's really your experiences that resonate loudly and clearly with this community. And recently we were fortunate enough to get some great real-life experience from Jennifer, an American student about to begin graduate work at the the School of Oriental and African Studies  in London.

So for the next couple of days, I thought I'd share Jennifer's advice with all of you. It's a slightly different perspective from ours, which is what blogging's all about.

My parents were fantastic financial planners. They saved enough money to almost entirely pay for my entire undergraduate education, which was fortunate because they also made too much money for me to qualify for federal loans.

I did have to take out a couple of private education loans as an undergraduate for the summer course I took in Geneva and the month I spent doing volunteer work in Brazil. When I began to apply for loans, having already taken Intro to Microeconomics , I figured that the student loan market was probably homogenous because every bank offers student loans. How different can they be?

Plenty different, let me tell you. Thus, I would like to offer "The Three Mistakes I Made (or Almost Made) Financing My Education."

Mistake #1: Not Reading the Fine Print

Know the details of your loan. Before you sign the loan, read the fine print. I'll bet you're thinking, "Oh brilliant advice, everyone knows that you're supposed to read over the details of a loan before you sign it!" But seriously, how many people actually read the fine print, those tiny little details in seven-point font that appear in a new PDF window and go on for about six pages?

I didn't. Brilliant financial planner that I am, I was usually applying for loans after classes started, in an hour between classes, after I'd received the notice from Student Financial Services telling me that I owed the school money. I chose my lender based upon the lender my roommate at the time was using. I hate filling out loan applications because it feels as though the amount is always large and relatively abstract — while I theoretically know the value of $49,000 (the cost of 1 Masters of Science degree , also a year's salary, the cost of a luxury car, etc.), the reality of that large an amount of money remains relatively unfathomable. The possibility that I will ever earn a salary high enough to pay it back seems unreal. Even the meager $10,000s I needed sporadically as an undergrad felt relatively daunting and thus, I avoided loan applications until they became absolutely pressing.

The reality of the situation is that taking out loans requires comparative research. The first undergraduate loan I took out required repayment upon completion of my BA, regardless of whether or not I was continuing my education at the graduate level — something that I was in no position to do.

Select your private loan company carefully. Some loans allow repayment to begin before graduation, some charge an "origination fee," others do neither. It is a good idea to check the student loan options at the bank you keep a checking account with, as some banks offer post-graduation interest rate reductions for current customers. Consider opening a checking account with a bank just for the interest rate reduction; a lot of students relocate to a new city and have to open a checking account anyway, so check out which banks operate where you go to school. Many banks offer checking account applications over the internet, so you can apply before you leave home with plenty of time to apply for an education loan.

For a helpful guide to the different types of loans and their terms, check out Mapping Your Future , and for extra financial planning fun, click on the "play Show Me the Future" link on the left side of the screen.

Next week we'll be back with Parts 2 and 3 of Jennifer's financial aid life lessons. Stay tuned!

Barbara

Think quick: How much loan money would you be responsible for paying if you graduated today?

Don't know? Don't worry; you're not alone. It's not uncommon for students to put loans out of mind until repayment. Even those who do know that they'll owe X amount once they graduate usually don't know what that means.

But since I've got you thinking about it, I challenge you to stray from the norm of being oblivious of your student loan obligations until repayment begins.

Here's a new way of thinking about borrowing: for the loans you already have (or those you are about to take out): Estimate how much your monthly obligation will be for that debt. Use a repayment calculator like these ones for Federal Stafford loans and private loans. Then, keep a running tab of what your total student loan debt will require each month.

I'll give you an example. Say I have $12,000 in Federal Stafford loans at a fixed rate of 6.8% and $10,000 in private loans at a variable rate of 7%, each with a 10-year repayment period. Using the calculators I find out that each month I'll be required to make minimum payments of $138 and $116.11, respectively. So once I graduate, I know that I'll have to budget at least $254.11 of my monthly income to my student loans.

Of course, since my private loan rate is variable, this amount could fluctuate.

By taking an approach like this, you'll know exactly what you're on the line for, and how much additional debt you'll be able to take on without feeling stretched each month. Ideally, your monthly student loan payments should not exceed 10-15% of your monthly income .

So in my above example, if my projected monthly pay will be $2,000, it may be a better decision to work more hours at a part-time job to help pay for my education so I can borrow less in the future.

You tell me: Is it easier to understand your student loan debt when think of it in monthly payments?