WHEN IT'S PAYBACK TIME
There are no quick fixes to make student loans
magically disappear once you've borrowed the money. But these
moves can make the payments more manageable and reduce the overall
amount owed.
• PAY EARLY AND OFTEN If your child
has taken out a loan that rewards her for being a model borrower,
make sure she lives up to her end of the bargain. Paying on time,
month in and month out, can save thousands of dollars in interest
over the life of the loan (see "How to Knock
$2,000 off Your Student Loan"). The easiest way to keep
a streak of timely payments going is to set up an automatic electronic
funds transfer; just setting up the EFT is often enough to knock
a quarter point off a Stafford's interest rate.
Once your child lands a job, encourage him to
direct part of any raise to making higher loan payments instead
of blowing the extra money on pizza and beer. He won't feel a
pinch, since he'll still get to pocket some of his extra income.
And he'll save on interest by shortening the life of the loan.
Not to worry: Student loans typically have no prepayment penalties.
• LET UNCLE SAM HELP You and your
child may be able to deduct as much as $2,500 of the annual interest
you pay on your loans. You can claim the full write-off if your
annual income is $105,000 or less and you and your spouse file
jointly; or take a partial deduction if you make less than $135,000
(the limits are $50,000 and $65,000, respectively, for single
filers). You don't have to itemize to claim the break, and the
savings can be substantial: up to $1,875 added up over five years
if you're in the 15% bracket, and as much as $3,500 if you're
in the 28% bracket. Home-equity borrowers get a break too: You
can deduct the interest on loans as large as $100,000. But you
do have to itemize to claim this write-off.
• SEEK FORGIVENESS If your newly
minted grad is interested in a career stint in public service,
he may be able to get at least a portion of his student loan forgiven.
In one program, for example, teachers who commit to working for
two years in schools serving low-income communities can get a
$4,725 annual grant that can be used to pay off student loans.
Programs also exist for doctors and nurses who agree to work in
areas that don't have enough medical practitioners; lawyers who
pursue public-service careers or work for nonprofits; medical
researchers; and those who agree to join the National Guard. You
can find a list of such programs at FinAid (finaid.org/loans/forgiveness.phtml).
• TAKE A TIME-OUT If your child hits
a rough patch—she has trouble finding a job, say, or is laid
off from the one she has—she can request a temporary halt to
her loan payments. This kind of hiatus is known as loan deferment
or forbearance, and it enables a graduate to skip payments for
months at a time. The bad news is that interest will likely continue
to accrue on her loan. The deferment may count as a break in her
on-time payment streak. The good news is that it will help her
maintain a good credit rating.
• CHANGE THE TERMS If your child's
struggles can't be resolved in a few months, he can lower his
monthly payments by extending the length of the loan. Stretching
the payments from 10 years to 20 by consolidating $23,000 in loans,
for example, would cut monthly payments by 34% from $265 to $176,
assuming a 6.8% interest rate. Parents can use the same strategy
for PLUS loans.
But stretching out payments is a step that should
be taken only after careful consideration. Depending on the terms
of the original loan, you could lose your on-time payment credits
and have to repay previously waived fees. You'd also end up paying
more in interest over the long run. "I'm a firm believer
in getting it over with as quickly as possible," says Eileen
O'Leary, director of student aid and finance at Stonehill College
in Easton, Mass. "Lives get complicated. You have children.
Bad things happen. You get sick. The more of the loan you can
get rid of up front before those complications set in, the better
off you are in the long run."
Ultimately, though, the single best thing that
you can do about student debt is to start thinking about it ahead
of time. Typically, parents don't register the magnitude of their
family's student loans until a child's junior year of college,
says Nancy Ziering of Madison Financial Aid Consultants. "Going
into debt to pay for an education," she says, "has to
be done with a very specific plan to get out of it."
