Planning and Managing Student Loan Debt Repayments Part-2
When you are thinking of repaying your student loans do not miss the following.
Borrow more and quickly:
Sounds silly, right? Actually, you need to manage your finances, and if you can avail loans with easier terms, you should always avail them quickly and try to pay off those high-interest private loans that you have incurred. There is usually a small window in the terms and conditions of most private loans that allow you to pay them off without incurring a pre-payment penalty. If you are fortunate enough to have that window, and at the same time, able to gather finances at easier rates and conditions, then do it quickly.
Remember, you need to get rid of private loans, cleanly, quickly, and legally. Private loans are not subsidized, so all the interest that accrued up to the moment you start repaying, including time at college and the grace period, all adds up to create a final, larger, principal amount. Ultimately, the greater the delay in starting to pay off your private loans, the more “interest-on-interest” you have to pay. So, with private loans, the strategy is to pay off as much as you can, and as quickly as you can before interest starts adding to and inflating the principal borrowed amount.
Don't forget fringe benefits:
This series of articles is not about how you should take a student loan, or how much you should take, or whether you should use a student loan to pay your tuitions or to fund your lifestyle. We are assuming that you already have incurred loans and now saddled with the burden of repaying them. Without going in ....
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Depending upon your situation and future outlook, as well as discussion with your family, you may opt for electronic billing. Some money lenders offer a small reduction, usually a fraction of a percentage, in interest rates to borrowers who sign up for auto-debit. Usually, you can get up to 0.25% reduction of interest rates in federal loans and up to 0.5% interest rate reduction in private loans.
And don't forget that while paying taxes, you are eligible to get a student loan interest deduction of up to $2500 each year.
If the situation is bleak, it's time to think of deferment of federal student loans
Usually, deferment plans aren't a good idea unless you are absolutely out of work or in a true financial emergency. If you are eligible for economic hardship deferment then for federal student loans you can ask postponing your payments. You can defer payments up to three years or avail of forbearance up to five years. However, except in the case of subsidized federal loans, the principal amount would get increased by the interest amount accrued during the postponement period and the resulting installments would become bigger.
Calculate smartly
Like every other thing in life, loan repayment plans have to be done smartly. Fixed rates are almost always better than variable ones. It is true that by extending the repayment period you see the numbers of dollars you are repaying to be far greater than in short term. However, most people lose track of inflation and the “real value” of the dollar.
As you understand, in the costs of essentials that are not affected by technological development, what you could actually buy with ten dollars when you entered college was significantly higher than what you can buy now after graduating. That's how fast the “real value” changes whether economists and statisticians admit it or not, or whether the government admits it or not.
Extended loan repayment periods at fixed rates always carry the possibility that what you would be paying near the end of the term in “real value” may be “peanuts” compared to what you paid in “real value” during the beginning of your loan repayment term.
Two parting words of advice: Do not secure your education debt with your house, and do not skip payments.
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