Avoiding the Horror Stories of Student Loan Debt

by Kevin Worthley, CFP, CDFA

For most students, going to college has become a near-necessity in the transition from childhood to self sufficient adulthood and their career path. Unfortunately, standing squarely in the middle of the path, like a tall NJ concrete barrier, is the ever rising cost of college. By some measures, the cost of college has risen 5 to 6 percent annually over the past decade and the average cost of attendance has doubled from 2000 to 2011.

In contrast to this rising trend, family incomes in the U.S. have stagnated over the past decade and may even be declining. This, plus the more limited capacity of governments to offer financial aid, is causing students and their families to finance college costs through obtaining loans, either by parental loans, student loans, or both. If the student and parents are not careful about how much the student is borrowing (and what their loan repayments after college could entail), the student may end college with a debt load they may have extreme difficulty paying back, and this debt is not allowed to be discharged in a bankruptcy.

Do

Do calculate total amount of debt

While contemplating your college choice, calculate the total amount of debt you expect to incur by attending that college and what your payments would look like. Once you have your financial aid award letters, look at the loans within the award. These could include Stafford and Perkins Federal loans andparent PLUS loans. Using an online loan calculator, determine what your total balance of each type of loan might be after four years and what your monthly payments would be if your repayment period was 10, 15 or 20 years. This could be helpful in determining if you can afford the payments after you graduate from one school versus another. Consult a financial professional to help you if needed.

Do consider your career path

Consider the career path you’re choosing. What could be your starting salary? Can you afford the payments on your student loans after graduation? Now that you have determined what your payments look like, will you be able to earn enough after graduation to afford them? Take your starting salary and calculate what federal and state taxes you might pay at that annual salary. Divide the result by 12. That’s your “after-tax” income. You’ll need to pay rent, utility bills, car payments and also buy food and clothing. After all of these necessities, what do you have left for student loan payments?

Do calculate your loan payment limit

Determine if your loan payments could be more than 10 to 15% of your after-tax monthly income after graduation. If so, it could mean you’ll be "in over your head”. Consider alternate, less expensive college choices or alternate means of paying for college without borrowing. Is working part-time while in college possible? Would you be able to attend college half-time (ex. night classes) while working to support yourself and paying for classes as you take them?

Do exhaust federal loans first

Make sure you borrow first from lower-interest fixed federal loan programs before you consider private student loans, which are generally at much higher and variable interest rates. Fixed rates are better than variable, especially as interest rates are historically low now; they may go up a lot at some point in the future, meaning monthly private student loan payments could be higher. Also, it could be easier to consolidate federal loans than private loans in the future.

Do pay down private loans first

If you must borrow via private student loans, try to pay these down to zero first before the federal loans. Like most other kinds of consumer debt (e.g. credit cards), to whittle down your debt load, it is generally recommended to tackle the most expensive (highest interest) debt first. Making sure you pay all monthly minimum payments on all your loans and then, if you can pay extra principal, do so with your private student loan balances first, then the next most expensive student loans and work your way down.

Don't

Do not lose your loan documentation

Keep your loan documentation organized in file folders and make sure you keep track of when your loans are transferred to loan servicing companies (yes, they can do this and they will). If you consolidate, make sure you keep track of which loans were consolidated as well as the new terms and the new lender or new service company. Many students get confused over which loans they have, the payments and the terms. Remain organized.

Do not miss or make late payments

When your payments begin, don’t miss or be late with a payment. Some programs offer a discount on the interest rate if you make 24 or 36 on-time payments. Set up an automatic payment from your checking account (and be sure there’s a sufficient balance to cover the payment each month). A good student loan payment history can be the basis for a good credit score later (such as when you’re seeking a car loan or mortgage for a first time home purchase). Conversely, a poor payment history could result in the opposite.

Do not ignore loan servicing companies

Don’t ignore calls or letters from student loan servicing companies. These collectors can make your life miserable if you are negligent with payments. Never forget that student loans are not dischargeable in bankruptcy. Delinquent student loans can adversely affect your credit rating for a long time and in extreme cases, especially with federal student loans, your wages could be garnished to force repayment. Student loan borrowing is serious business! If you’re having trouble with payments, try to discuss alternative payment options with the lender or servicing company. It may not work (they may insist you stick with the payment plan you have), but if you are earnest about repaying your loan, they may work with you rather than have you default or continue with missing or late payments.

Do not forget to consolidate after graduation

Don’t forget to try to consolidate your federal loans and separately consolidate your private loans after you graduate. Sometimes consolidation can make repayment more affordable (cash flow wise) while you’re launching your career.

Summary

As in most other personal finance matters, planning ahead is usually a worthwhile effort. It may involve more factors in your college decision, but with the cost of college so high today, families and students need to consider how workable the debt burden will be on the student’s future. Often, working with a financial professional (financial planner or accountant) can be helpful in calculating future payments and affordability. Too many students today are struggling with $50,000 to $100,000 or more in loan debt and wish they had been more thoughtful and aware of how much they were borrowing. Avoid falling into the same trap and learn from their mistakes.

Cash Crunch in Your Forties: Your Children’s Future or Your Own?

by Stacy Francis, CFP®, CDFA

This dreadful dilemma was the main topic of discussion at a recent Savvy Ladies event. And the economy being what it is, alas, it is one to which far too many of us can relate. We all want what’s best for our children, so what could possibly be more important than securing them a top-notch education? On the other hand, past big 4-0, retirement is no longer a hazy, distant concept but something very real, approaching at rocket speed. So when faced with job loss and financial hardship, how do we prioritize?

The answer is quite simple: stick to your retirement savings plan, and direct whatever’s left toward the college savings account. It may sound selfish, but the truth is, no one’s going to give you a scholarship or a favorable retirement loan. And not only do your children have time on their side, greatly enhancing their chances to pay back whatever balances they may accrue, but the less savings you have set aside for them, the more financial aid becomes available to them. Once your financial situation starts to improve, you can certainly lend them a hand.

Ask any child what he or she would prefer – a bit of student loans or an aging parent crashing on the couch for, say, fifteen years. I’d say chances are high he or she will opt for the student debt.

So stick to your retirement savings plan. Then help your children.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.

Saving for College in Tough Times

by Stacy Francis, CFP®, CDFA

“My daughter is off to college in 2010,” a woman told me during the Q&A session at a recent conference. “Now the savings account we opened for her has been cut in half, and my husband has lost his job. Will a local community college be her only option?”

While there are many good community colleges these days, she was delighted to learn that the answer is no. There are many things she and her daughter (and of course the father) can do to secure that college education. Below are just a few:

  1. Now that stock prices are low and yields on income-generating securities are lower, they can maximize portfolio returns by keeping at least a portion of the money in mutual funds invested in stocks. The good news is that their portfolio has 2-6 years to recover.
  2. If at all possible, they should continue to contribute toward the college savings account. They now need the money more than ever.
  3. The lower their household income, the wider the range of financial instruments that becomes available to them. I suggest they take advantage of financial aid and grant opportunities!
  4. If the daughter happens to be a brainiac, or an athlete, or a minority, chances are greater that she’ll be able to obtain a scholarship to pay for part of the expenses.
  5. There’s always the option of the daughter taking on an extra job during her studies. Many colleges offer work-study programs where wages can be applied directly toward tuition expenses – and students can gain valuable work experience. I worked for four years in my college cafeteria. It gave me extra cash and the revelation of why going to college was so important. I did not want to be in that cafeteria for the rest of my life.
  6. Finally, let’s not forget about student loans. Despite the fact that many parents strive for their children to remain debt-free, this is not always possible. Student loans are there to bridge the gap between the education that will secure a child’s future, and the parents’ means to pay for it.
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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.

How to Manage Student Loans

by Stacy Francis, CFP®, CDFA

A young woman at a recent Savvy Ladies seminar had just received her first student loan bill, and subsequently, her first panic attack. What was she supposed to do? There was no way she could spare that much money per month. Could she make smaller-than-minimum payments?

The answer is yes, she could. But for most people, it may not be the best idea. Here’s why.

Around graduation time, most students’ mailboxes are stuffed with offers from banks to refinance their debt and shrink their payments. So it is certainly possible. But the problem is, the longer you stay in debt, the more interest you are going to pay. And paying interest is basically throwing away money. While there are certainly worse kinds of debt than student debt, if you can stay on your regular payment schedule, it is generally wise to do so.

Another thing to note is that even if all your debt is with the same company, it is most likely split between a few different loans with different interest rates. If you do not stay on top of the company, they will apply your payments toward the lowest interest loans first – the exact opposite of what you want them to do. By making sure your money goes where you want it to go, you can save a ton of cash.

Of course, as I told the young woman in the seminar, there’s no reason you can’t pay off your loan earlier just because you have refinanced it. For her, refinancing now but striving to pay it off as soon as possible is probably the best option. What will work in your case will depend on your unique set of circumstances.

1 Comment

Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.