Time to Pay It Back for Graduates
July 11, 2011 (The Buffalo News, N.Y.) For many graduates, finishing college and entering the world of work means facing their first really big bill -- college loans. Whether the amount is four digits or six (ouch!), there are tips and tricks to help make paying it off a little less daunting.
"It is different for everybody, it depends on the size of the bill, income [and] professional goals," said Laura Ferrino, vice president of financial planning and a certified college planning specialist at M&T Bank. She said everyone should talk to a financial planner, but there are some basic steps anyone can follow.
Graduates need to make all of their loan payments on time to build their credit score, Ferrino said. Students should track their credit scores to make sure all of their bills are being paid the way they think they are. (AnnualCreditReport.com provides credit reports three times a year for free.)
They should put extra effort into paying down high-interest debt, like credit card debt, with any extra money they have, she said.
Students who cannot make the monthly payment and have federal loans have a couple of choices to decrease their bill, Ferrino said.
The extended repayment plan allows payment over 12 to 30 years, and the graduated repayment plan gives students smaller payments at the beginning of their loan with larger payments at the end. Students might take advantage of this plan if they are confident they will earn more as their career progresses.
Income and loan amounts are taken into account in the income-based and income-sensitive plans; both allow smaller payments over a longer period of time. Graduates who qualify for the income-based plan would pay back an amount based on their income, with the remainder forgiven after 25 years.
As good as these plans may sound, they come with a warning.
"When you deviate from the standard repayment plan, college ends up costing a lot more," she said.
Julie Jaeger, a 2009 Bryant & Stratton grad, learned that lesson the hard way. Jaeger started college as an adult and borrowed $21,000 to pay for her associate degree. After a 16-month consolidation process, she will be paying back $43,000 over 20 years.
"I never imagined it would turn into a mortgage," she said. "I'll be close to retirement by the time I pay them off."
Jaeger said she knows she could defer the loans, but wants to pay them off as soon as possible, although she and her husband are saving for a house, too.
Deferment requires graduates to prove that they need more time to pay their loans, Ferrino said. Some common reasons loans are defered are continuing education or unemployment.
Saving can be a better choice than paying off loans depending on the rate you are borrowing at.
"The answer really depends on the current interest rate environment," Ferrino said. "Also, you have to make sure that you are disciplined enough to save it."
If you are getting that bill for a loan every month, you are going to repay it, Ferrino said. It takes more effort to put money aside each month.
An automatic deduction can also help graduates budget and pay on time, she said. When a loan payment is automatically withdrawn from a bank account, the money is not there for you to spend and you become accustomed to budgeting without it.
Budgeting for multiple bills can be important since many graduates, like 2011 University at Buffalo graduate Carrie Norton, are balancing car and credit card payments as well.
Norton worked part time while attending classes her last semester and starts paying her loans this month.
"Right now I'm just going to pay as much as I can," she said. "I used to get checks back [from loan and scholarship money]. ... I wish I had put that money away to pay off my student loans right away."
Loan payment for students like Norton should not exceed 10 percent of after-tax income and he or she should follow the 10-year repayment plan, Ferrino said. Consolidation can also be a good option to simplify loan payments.
Students with a track record of paying loans on time may be able to negotiate a lower interest rate on their loans, Ferrino said. It is worth asking for discounts for things like: a history of on-time payments, using automatic withdrawal or consolidating at any point in the loan repayment process.
"The delinquency schedule can be penalizing, but if you show [on time payments] it can help you get a better rate," she said.
Parents looking to help students foot the bill have a few options, Ferrino said.
Parents can gift their child up to $13,000 without paying a gift tax on the amount. Another thing Ferrino discusses with parents is a home equity loan.
"Yes, it can often be a viable source of funding, but with caution," she said. "Do not put your retirement in jeopardy."
All of the interest paid for home equity loans can be deducted no matter what the income level.
Interest paid on student loans qualifies for up to $2,500 in tax deductions for people with an income less than $75,000, so most recent graduates qualify, said Joe Burwick, tax manager at Freed Maxick and Battaglia.
"If the parents take [the loan] out and pay the student loan, they get to take the deduction. If the student takes out [the loan] and pays the student loan, they get to take the deduction," Burwick said.
The loan principal does not qualify for any deduction because students can take tuition as a deduction when they pay it the first time, said David Schlein, tax partner at Lumsden and McCormick. Students who did not take advantage of the deduction when they were in college can still receive some of the advantages by amending their return up to three years after the year they paid tuition.
Students looking to pay back loans in a nontraditional manner might consider AmeriCorps, the Peace Corps, Teach For America or the military, all of which offer some tuition reimbursement programs depending on the loan.
Up to 70 percent of a student's Perkins loans could be paid for with four years of Peace Corps service, said communications specialist Molly Levine.
AmeriCorps participants may receive up to $5,500 for a year of service to be used for education within seven years. Twelve New York universities match the money given to students. Teach For America has a similar tuition aid program to AmeriCorps.
Joining the armed forces could pay for $65,000 of student loans depending on the branch and the particular loans. To determine eligibility and find out more about repayment options, contact a recruiter.
Graduates teaching in low income neighborhoods or working at qualifying public service jobs may also qualify for loan forgiveness through federal programs. More information and the application for loan forgiveness is available at www.studentaid.ed.gov.
There are many other federal programs to help pay college loans, and some employers offer them as part of their hiring packages.
Once you have your payment plans established and under control, new graduates should consider saving some money.
"If your employer has a 401(k) plan, you should contribute as much as the employer will match," Ferrino said.
If the employer does not have a 401(k) plan, the employee should look into setting up an Individual Retirement Account. Money saved while a person is young has more time to grow.
Graduating out of college can be a cold bath when the loans come due, because anyway you approach them, the loans must be paid off.
"These federally backed student loans cannot be dissolved through bankruptcy," Ferrino said. "Borrow responsibly; it is still a loan and at times it can still be a loan bigger than a mortgage."
Tips for paying off college loans
--Pay off high interest loans first.
--Make regular payments to establish good credit.
--Make sure bills are being paid by checking credit report periodically.
--Try to maintain the standard repayment plan without extending payment period.
--Consider using automatic withdrawal to pay loans.
--Try to keep payments at 10 percent of your after-tax income.
--Consolidating several loans can simplify payment.