- Borrowing to finance higher education should be considered and done as an investment in your future.
- As with all borrowing C.E.O.’s must recognize how much they are borrowing, how it is going to enhance the value of the enterprise and have a plan for repayment which provides for making a profit.
Five Ways To Manage Your Student Debt
Big loan balances are becoming the norm for college graduates. These tips can help make that burden bearable.
Debt has become the evil four-letter word of higher education. The average student leaves college with $30,000 in loans, but some grads of pricey schools owe way more. Medial school graduates in the Class of 2005 had overall median student loan debt of $120,000 with 33.2%with debt at $150,000 or higher.
Paying back those loans is often difficult for new grads, especially on a housestaff stipend. But there are ways to make the repayment process go more smoothly than you might expect.
Here are five tips experts suggest to make handling loans easier. Some involve small details and others require major lifestyle overhauls, but all are doable. And there’s little to lose —besides the worry that you won’t be able to make that next payment.
1) Take an Inventory and Create a Budget.
If your expenses exceed your income, you need to take a step back. Certified Financial Planner Donald Haas qualifies excessive debt service—including money for student loans, credit cards, and car payments—as 25% or more of gross annual income. That means a recent graduate earning $50,000 per year shouldn't be paying more than $12,500 annually on loans or about $1042 per month; which is just a bit less than the $1168 the payment for a 10-year $100,000 Stafford loan at 7.14%.
For many medical school graduates making payments under these circumstances will be impossible. Even with consolidation and payments of $657 per month, most graduates will opt for deferment or forbearance – a postponement of payment until they complete their residency. Many medical school graduates decide that they cannot afford such payment even before they know what they really have in terms of income and assets and future expenses.
Before you figure out how to manage your payment schedule on your income, during or after residency you must first write down exactly what you earn and already have banked away, and what you owe. Create a spreadsheet with your net salary (what you actually bring home) and any assets, investments, money in your savings and checking accounts, and anything else that is of value.
After seeing what money you are bringing in, start building a budget. All expected expenditures for the year or month—whichever is easier for you to view—should be listed in another spreadsheet, including rent, food, entertainment, trips, and loan payments and do not forget to pay yourself (savings and investments for your future).
Now you can start playing around with numbers, seeing where you can cut back, and how much—or little—you'll have to spend on extra items. And remember, living with roomates or your parents after graduation is not the worst thing in the world, brown-bagging it and cooking save a significant amount of money, and thinking before pulling out your wallet is a necessity (see BusinessWeek.com, 6/5/06, "Mom? Dad? I'm Home!").
2) Get Rid of High-Interest Debt First.
A large student loan balance is probably scarier than a few thousand dollars worth of credit-card debt, but interest rates for student loans are relatively low, while those on credit cards tend to be much higher. On July 1, 2006 the interest rate on Stafford loans for students not yet in the repayment period rises to 6.54%, and 7.14% for students in repayment, unless they consolidate and lock in a lower rate. Private loans are floating around the 7% to 10% range with some even higher. On the other hand, most credit-card interest rates are about 16.5%.
So if you have a little leftover cash one month, or even better if you structured your budget to have discretionary cash after your other bill payment, pay the minimum consolidation student loan payment but use the extra bit to pay off credit-card debt. In some cases where the amount and interest rate of private student loans are so high it may be in your best interest to defer or forbear your significantly lower interest rate consolidation loan and apply that payment to high interest rate credit cards and private student loan debt.
See below: Should You Pay Off Your Debt or Invest?
3) Don't Ignore Your Loans While in School or During Residency
You should know about exactly how much you're going to owe after graduation and what—if any—part of those payments you will be able to make. If you do not have a complete record of your student loans make an appointment to see your school financial aid office to review their records and don’t forget contacting your undergraduate or previous graduate schools you attended and received financial assistance. You can also contact an MEDebt Solutions Program consolidation counselor for a Personal Consolidation Diagnostic Review which will assemble all of your federal student loans records as reported by the National Student Loan Data System (NSLDS). The counselor will review this data with you and answer all of your questions and assure you are aware of all of your options.
In general, as a student, it is suggested that if you make enough money, you can make interest payments while in school. That cuts down on the nut you have to pay back when you graduate. Medical students nor medical school graduates generally do not have the time to take on part-time employment to pay on interest.
As a student, if you have excess money, it would be wiser and simpler to just not borrow as much. If you can't afford interest payments while still in school and during residency, put your hard-earned cash into a savings account to use for loan repayments or other expenses after graduation and during and after residency.
It is very important that as a student, resident and practicing physician that you always keep your lender and loan servicer up-to-date regarding your contact information. In addition, you should always give high priority to any information or correspondence from your lender or servicer. In order to efficiently and effectively manage your student loan debt you want to be certain that all information is correct. This is also very important because with consolidation, significant interest rate discounts can be achieved by making on-time electronic debit payments. See Consolidation Facts, Tips & Discounts for more details on achieving and preserving your interest rate discounts.
4) Take Advantage of All Lenders' Benefits.
Most lenders offer perks to borrowers, but many recent graduates are unaware of exactly how they work. Most companies offer quarter-percent interest-rate reduction for eligible borrowers who pay through auto debit. Besides saving on interest, auto debit is a way to make sure payments are made on time.
Other lenders give discounts if on-time payments are made for a consecutive number of months, usually 36 or 48. However, if you miss even one of your payments, the privilege can be revoked. Students should also be wary of fees to consolidate loans. With a new law in place, students with federal loans can shop around for a consolidation lender instead of having to stick with the one they took a loan out with. This allows for more flexibility but also the need to examine options carefully. You want to be aware and avoid situations where prepaying a loan or a single late payment may revoke the benefits forever and in some cases earned benefit savings may be added back into the loan balance. It is important that you, understand exactly what the benefits are, the details for qualification and maintenance. Achieving and protecting your borrower benefits should and can be easy if you know the facts and appropriate strategies to follow.
Only some companies that offer private loans allow consolidation. In general we recommend that graduates NOT consolidate their private loans because of the increased expenses such as new origination fees that significantly adds to the total cost of the loan without significantly lower payments. Here we suggest a strategy where the entire budget and debt portfolio is reviewed and priority given to the accelerated payments (additional payment on principal) are made on the highest interest rate loans.
5) Look at Repayment Options.
If you consolidate, you have the option to extend the loan repayment period, often up to 30 years instead of the standard 10. This will decrease monthly payments but increase overall interest paid. In many publications borrowers have been cautioned to be careful about extending repayment because they are told that they will pay more interest and lenders make more profit from them.
Consolidation is a magnificient money management tool which if combined with a deciplined saving and investment plan is a key fundamental to personal economic stability and security not to mention the potential for happiness. Consolidation puts more of your money in your control earlier in your money earning career than if you paid off your debt in the standard ten year period. The key for many may be just to reasonably survice due to cost of living. For others who are less financial savvy consolidation may add to their lifestyle. For those who earnestly wish to create the fulfilling future they desire then consolidation enables them to put their money to work – thus having their money make money so that they can own and not rent their future. See Should You Pay Off Your Debt Or Invest?
Jean Main, director of student financial aid services at the University of Connecticut, suggests students examine benefits closely, especially when it comes to consolidation. "You have to make sure you take actions required to get the benefits," says Main. "Be cautious about immediate benefits vs benefits down the road."
Borrowers should only extend their repayment period if absolutely necessary. The maximum you can cut your payments is in half, so the decrease can be significant for some borrowers, especially if money owed far outweighs money earned. Still, remember that with consolidation, you can always accelerate your payment and pay off your loan at any time and with out any penatly.
If you decide against an extended repayment plan on your federal loans, you can opt for the standard 10-year repayment plan—where you pay the same monthly rate for up to 10 years—or the graduated plan—which starts with smaller payments that slowly increase. Students who can prove they are in extreme need and have economic hardship can qualify for the income contingent plan. They are given 25 years to pay back whatever portion they can, and after that period, unpaid debt is erased. However, qualifying for such loan forgiveness is difficult and any amount ultimately forgiven after the 25 year period is subject to taxation.
Adapted from: BusinessWeek online, June 27, 2006, Financing Your Eduation by Julie Gordon
