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Congratulations, Graduate! Now, Pay Up

Addressing college debt

When asked what a college graduate wants to be, instead of traditional answers like nurse, lawyer or businessperson, the answer has become less specific. A college graduate wants to be employed.

The average student loan debt in America for 2013 was a staggering $29,000. As tuition and interest rates continue to climb, it is expected that the size of this debt will continue to grow, too. For some, a student loan is their first introduction into the real world of personal finances. There is no charming, explaining or wiggling your way out of it.

As cute as the loan officer may think the new grad is, the terms are ironclad. Borrowers have a grace period of six months after their last qualifying classes to begin repayment. If you didn't graduate, payment still begins in six months. Whether you have the job you expected, or even a job at all, also doesn't matter. All that matters is that you signed a contract to pay.

Student loans can also be a very positive thing. If handled right, student loans can be the foundation of being a responsible borrower and building a good credit score. Both of these are necessary when the time comes to make major life purchases, such as homes, cars, etc., and the borrower wants to secure the lowest interest rate possible. The first few years of debt repayment are crucial in launching their financial life on the best road possible.

Where to Start

Six months after graduation, or the completion of your last qualifying course load, it is time to begin repaying the money borrowed to finance education. Before the first payment date, the borrower should receive letters from lenders or be invited to attend exit counseling with a loan officer at school. This is a good time to organize school debt and come up with a repayment plan.

Depending on whether a loan is private or federally based, there are a number of different options available to structure the debt. These options range from fixed, graduated, extended, income-sensitive, income-contingent and income-based repayment plans. Federal loans generally offer all of these repayment options; whereas private loans sometimes only offer one.

Consolidation of debt, particularly with federal loans, is a popular way of establishing one fixed amount for the lifetime of the loan. However, in exchange for the simplicity, sometimes you lose benefits. For example, you could lose the lowest existing interest rate, or lose certain benefits, such as cancellation benefits or interest subsidies. Whether this is still the best option depends on how many different loans a borrower has, how many monthly payments this would entail, the dollar amount of all the monthly payments added together, and the complexity involved in paying multiple loans at the same time.

Strategies to Eliminate Debt Faster

After a borrower organizes their loans and determines whether to bundle them or not, the next step is getting them paid off as fast as possible. Here are some painless ways to reduce the amount you pay in interest and cut down the length of time needed to satisfy the loans in their entirety.

Bi-Weekly Payments: Cutting your monthly payment in half and having it drafted once every two weeks is a great way to pay off a loan faster and cut down on interest paid. By paying bi-weekly instead of monthly, this will add up to an extra monthly payment each year. Another benefit is that two smaller payments can seem less overwhelming than one larger. Check to see if your lender offers this option, as well as an additional discount for paying as an automatic draft.

Adding Additional to Principle Each Month: If your loan payment is $200 a month, make it $225. Adding additional money, regardless of the amount, will speed up the repayment time and reduce interest over the loan term. The more you can add, the faster your loan is paid off.

Use Tax Money: Use any money received from a tax refund to help pay down student loans. This is especially true of money received from claiming a student loan tax deduction. This is a perfect extra payment to apply to outstanding balances.

Debt Forgiveness

Programs offering debt forgiveness can seem like a dream come true. But nothing that comes free is ever easy. But if you are willing to put in the work, there are ways to forgive some or all of your debt. It is important to keep in mind that because these are government based, the congress can change, adjust or cap this option at any time.

Public Service: In order to receive consideration for debt forgiveness under the public service program, you must first make 120 qualifying payments, and all of the payments must be on time. This means that 10 years of on-time payments must be made before any "forgiveness" can take place. That means 10 years working in a public service position (generally government or non-profit) and this forgiveness only applies to federal loans.

Income-Based Repayment (IBR): Maximum monthly payments will be capped at 15% of discretionary income. Forgiveness eligibility does not occur until after 25 years on qualifying payments.

Income-Contingent Repayment: Payments are recalculated each year based on gross income, family size and federal loan balance. Like IBR, eligibility for forgiveness begins after 25 years of qualifying payments.

Pay as You Earn Repayment (Payer): Maximum monthly payments will be capped at 10% of discretionary income. Forgiveness for this loan begins after 20 years of qualifying payment.

If a student wants to explore any of these options, it is wise to sit down with a federal loan officer and examine the pros and cons of these programs. Though receiving federal student loans over private is definitely a pro, the potential stability of the programs for forgiveness can be a con. Twenty-five years is a long time to bank on consistency.

Secondly, paying small amounts over a long period of time means ultimately more interest accrues and more interest is paid. Finally, payments rise as income rises. So depending on where your career path leads, what starts out as a very small amount could end up being quite substantial later down the road.

Financial Future Begins Here

As overwhelming as student loan debt may seem to a new graduate, a degree is still seen as a good investment over the span of a career.

A Huffington Post article from February reported that the earnings gap between young adults with and without bachelor's degrees has stretched to its widest level in nearly half a century. And often student loans are satisfied at the age when a person's income power is at its highest, increasing their buying and investing power during peak earning years.

By taking responsibility for educational costs from the onset, and enacting the best plan for repayment, the new graduate can not only reap the benefits of higher education on their career path, but also on their path to a positive and responsible financial future.

Cindy Diccianni is a certified long-term consultant, a registered investment advisor and a registered representative with Leigh Baldwin & Company member FINRA and SIPC. She is founder, owner and principal of Diccianni Financial Group, Inc., East Norriton, Pa. You can contact her at www.DFGpa.comJeanne Lawson is client manager with Diccianni Financial Group Inc. 

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