Student Loan Repayment Strategies

It is that time of year when many students reflect on their academic year. Oftentimes, this includes consideration of the money they have spent – including what they borrowed through student loans. Much press has been given to student loans and it is clear that student loan markets are tightening, particularly the market for private student loans. A recent article in the Wall Street Journal indicates that FICO credit scores of about 650 are now required to borrow from private sources. If you are a continuing student (we’ll have more about this later), consider federally guaranteed loans first and then look for private loans. If you are graduating, you may be considering repayment strategies, such as consolidation.

In general, you may consolidate your student loans with any lender you choose. The choice of lender is yours and there is no “right answer” that we can suggest that would be correct for everyone. Each lender has their own terms and incentives and the plan that fits your situation the best may not be the one that fits your roommate’s. Consider your career, prospects for growth in your income, and your personal values and then “do the math” to ascertain the best approach for your management of your loans.

Consolidation can reduce your monthly payments, reduce the rate of interest you are being charged, and make your bookkeeping easier – with only one check to write or one electronic transfer. In general, federal loans can be consolidated and they include both subsidized and unsubsidized Stafford Loans, Federal PLUS Loans, Direct PLUS Loans, Federal Supplemental Loans, Perkins Loans, Health Professions Student Loans, Health Education Assistance Loans, Federal Nursing Loans, and Federally Insured Student Loans. When you consolidate, however, a major choice is your desire for a longer, or shorter, repayment period.

If you plan on repaying your student loan over an extended period of time, look for loan consolidation programs that offer the greatest reductions in the rate of interest you are charged (APR). Often, state programs provide such benefits and information about some of the more popular programs may be found at http://financialsuccess.missouri.edu/stateprograms.pdf.

If you plan on repaying your student loan in a relatively short period of time, five years or less, consider a consolidation program that reduces your principal owed for making your monthly payments on schedule for a contractually stated period of time. Importantly, begin making payments to repay the loan principal as soon as you are able. Most loans have a six-month grace period following graduation where you do not need to make payments. If, however, your loan is an unsubsidized student loan, interest charges will be accruing against your account during this “grace” period, thus increasing the amount of your debt. On the other hand, if you have a subsidized student loan, no interest is accruing. If you make periodic payments during this period to your subsidized loan, the full amount of each payment will reduce the amount of principal owed, reducing the total you must repay over time.

Importantly, you must repay your student loan. Nonpayment will destroy your credit rating, making it nearly impossible for you to borrow for home purchase, graduate school, or to begin your own business. Nonpayment often results in finance charges, collection fees, or garnishment….something you’d probably not like your employer to know. Another, often neglected, fact is that student loans cannot be discharged in bankruptcy. As such, there is no relief other than to meet the contractual obligations that are yours. Try to forget the lattes you purchased with this expensive money and focus on how you can get the greatest return on the investment you made in yourself with the education you purchased. More than anything, this investment is the greatest key you have to open your door to Financial Success.

Other sources of interest:
For ideas on Federal consolidations:
http://www.federalconsolidation.org and http://www.ed.gov/students/college/repay/edpicks.jhtml?src=ln

For ideas on private consolidations:
http://www.finaid.org/loans/privateconsolidation.phtml


I apologize for this tip coming out later than usual. My goal for delivery is 5:00 a.m. Central Time. Yesterday, my freshman daughter came home from college and I was asked to be chef for 20 of her high school friends. Then, this morning, I met with the Hospice Care Team with regard to my father’s end of life “game plan”. Yes, we all live the life we have been blessed to live with the tools we acquire through time. I am grateful for those I’ve acquired.

As usual, if you have friend, colleague, or family member that you think would benefit from receiving the MU Financial Tip of the Week, please forward this to them. Tell them to send an email to financialsuccess@missouri.edu with “Subscribe” in the Subject: line. We wish to be your objective source of financial information for today's young adults and students. It is a part of our mission, as a respected land-grant university.

- Robert O. Weagley, Ph.D., CFP(r)
Chair, Personal Financial Planning
University of MissouriColumbia, MO 65211