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Repaying student loans: Slow is OK, but never stop

Dear Steve,
What is the best way of paying off student loans after graduation? Should I try to pay off as much as possible soon after graduation or should I just pay the minimum? Thank you for your reply. -- Martine

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Dear Martine,
Congratulations for planning ahead regarding paying off your student loans. You are clearly way ahead of me at that stage of my life. I didn't have a clue about financial matters. My, how things do change!

I almost always recommend paying off a loan as soon as possible. Even a loan with a low interest rate costs you money, and carrying a burden any longer than you need to doesn't make sense. However, if you have other debts, it makes good financial sense to put all extra money toward first paying off the loan with the highest interest rate, while paying the minimum on the others. Once the higher rate loan(s) is paid off, then, you can begin aggressively paying off your student loans.

For more than one student loan, you might consider consolidating your student loans. Consolidating will reduce your interest rate and decrease your monthly payment. The money you save in interest charges can be used to increase the monthly payment. Be aware that once you consolidate your loans you are not eligible to consolidate again.

Anyone with a loan or considering a loan needs to pay attention to the details of the agreement. Student loans are no exceptions. One good reason to pay off your loan quickly is if you have graduated repayment. This means payments are lower at the beginning of repayment and increase at specified periods and in specified amounts over the term of the loan. A standard repayment is when principal and interest payments are due each month in the same amount throughout the loan repayment term. Check you agreement closely so there are no surprises.

With that said, lets put this in context. What are your goals over the near and long term? For example, will you need to buy a car soon? Do you need to save for it, and how much will you need by when? You will probably also need to build up a savings account at the same time. You seem to be a good planner, so I recommend that you allocate some of your income to building up an emergency fund that will eventually have enough money to pay your expenses for three to six months. This will take time, but it is an essential step in becoming financially secure. You will find that life on your own is full of surprises and unexpected bumps. A savings cushion will keep bumps from turning into mountains! Look at your spending plan to see how much you can afford to pay to aggressively pay off your student loans while also building up your savings account. If you do not have a spending plan, create one.

Martine, you are committed right now to paying off your student loans. Should that change for any reason, please review the following information. Defaulting on a student loan is different from missing a class or being late for an appointment. It is often not excused, it will be noted in your credit report and it will not go away easily.

A loan is considered delinquent if you do not make monthly payments on time; even one missed payment can make your loan delinquent. Default occurs when you miss a number (see your loan documents) of payments.

If you are delinquent and default on your federal student loans, you may face these severe consequences:

  • The federal government could withhold your wages.
  • The Department of Education could claim your IRS refunds.
  • Your loan expenses could go up with the addition of late fees and penalties.
  • Your future ability to access credit could be jeopardized because your loan defaults can be reported to all of the national credit bureaus.
  • You may be handicapped in getting certain types of jobs, security clearances, licenses and even insurance.

If you have a problem that affects your ability to make your payments in the future, you can ask about deferment or forbearance. It is best to contact your lender to discuss options in advance of them contacting you. A deferment allows the borrower to postpone loan repayment for specified periods and under certain conditions. A forbearance suspends or reduces payments, again for a specified time and under certain conditions. In both cases, interest will continue to accrue on the loan, making it bigger, and you must still repay the loan.

This is a very exciting time for you. If you develop a plan and stick to it, you will enjoy these first years to the fullest and not at the expense of the future! Good luck.

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

-- Posted: April 25, 2003




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