Parents with college-aged children have several financial expenses to juggle. They might have younger children at home to clothe and feed, plus they are frantically scurrying like a squirrel before winter paying off a home mortgage and saving for retirement, in addition to helping their child pay for college. The most recent graduating class, the Class of 2016, has an approximate $37,000 per student in student loans that will be entering repayment status any week now. With the first round of monthly statements arriving in the mailbox soon, now is an opportune time to consider repayment options to reduce the cost of repaying student loans.
My Own Student Loan Story
Student loan debt is one of the reasons I started Money Buffalo. I graduated from college in 2008 with $50,000 in student loans. My parents did what they could, primarily by acting as co-signors for my student loans, and I borrowed from federal and private lenders to cover the tuition and fees. As a student, the magnitude of having to repay 50,000 dollars really didn’t mean much until I got was on my own in the “real world” and had to start making the monthly payment.
Fortunately, I was blessed with a high-paying job that allowed me to pay 3 years of accrued interest (I made interest-only payments during my senior year) and was able to live frugal enough to pay off my student loans in three years. I do not have any regrets for attending the college I did as life would have been completely different if I chose a less expensive institution, but, there are a few things I wish me & my parents had known about student loans when I was a student.
Since I cannot turn back time, I encourage aspiring parents of college students and future students to know all their options before, during, and after college. Four years of college can easily be more expensive than the first 18 years of life combined. For new college graduates, each new graduating class enters the workforce with more debt than any preceding graduating class and the trend doesn’t seem to be reversing anytime soon. I can only imagine how much college will cost when my own 15-month old will be old enough to attend.
Repayment Options for Parents During College and After Graduation
Below is a combination of advice my parents & I implemented and would have considered as well. For your own college experience, you can easily start practicing some of the below repayment options, perhaps you already are doing several already!
- Co-Sign Student Loans
There are a couple different loan options available to finance college. Parents can borrow directly using the Federal PLUS loan program for instance. My parents decided the best option was to co-sign for myself and my younger brother. You might think co-signing is a little risky. There is an element of risk and the decision ultimately boils down to the relationship between the parent and child. As a whole, my brother & I are pretty good at managing money so they were not too worried that we would spend all our money buying a fancy sports car and couldn’t afford the monthly payment, forcing our parents to make the student loan payments.
One benefit of co-signing is that it places some of the responsibility of earning a diploma on the student, instead of college being a free ride to party for four years before officially entering adulthood. It also helps the student establish a credit history and qualify for the lowest student loan interest rates.
- Pay Loan Interest During College and Before Capitalization
The “honeymoon” period for most parents or new grads might happen when they receive a notice from the lenders stating $X,XXX of deferred interest needs to be paid before November 15th to prevent it from compounding into the borrowed principal and essentially begin paying interest on interest. It’s the opposite of how compound interest is supposed to work. If you have full deferment loans (no principal or interest payments required during school), it can be easy to only look at the amount of money borrowed and think that is the only amount that needs to be paid back.
I made interest-only payments during my senior year and was able to afford them by working a part-time job. For the first three years of college, I elected to defer the interest payments and had a sizable amount of accrued interest to repay before it compounded. Partially speaking out of pride, I drew from savings and some graduation gift money to pay off the interest before the six-month grace period ended and my student loans entered repayment status.
- Pay Ahead
This is my favorite repayment method because it has the potential to save the most money in interest payments. Making the minimum loan payment each month will allow you to repay the loan on schedule without penalties, but will also be the most expensive. I paid off my loans early because I paid more than the minimum payment each month by delaying purchases like buying a house or a new car and automatically giving any tax refund or extra income straight to the lender. I saved close to $9,000 in interest by paying off my loan early.
- Refinancing and Consolidation
Another popular option is to refinance and consolidate student loans. To avoid confusion of the two terms, you refinance private loans and consolidate federal loans, but, the process is the same. If I did not have the opportunity to pay my loans off so soon, I would have strongly considered refinancing my private student loans. The average interest rate for my student loans, was approximately 6.8% when I graduated although the rates did slide down some during the Great Recession. I really didn’t know a lot about refinancing until the end of my student loan journey, when my balance was too low to qualify.
Refinancing is a great option if you need a little breathing room and the current monthly payment is too high, as you receive a lower monthly payment due to an extended loan life (i.e. 15 years to repay instead of 10 years). I also like refinancing because it’s possible to renegotiate the loans for a lower interest rate, as low as 2.20% variable and 3.5% fixed, which makes prepaying the loan even less expensive.
Students and parents both can refinance private loans or consolidate federal Stafford, Perkins, or PLUS loans. If you decide to refinance, be sure to choose a no-fee lender that will not charge you an origination, application, or prepayment fee. The entire point of refinancing is to save money, and additional payments make it harder to do so.
Depending on the lender & type of loan, your minimum balance will need to be at least $5,000 or $10,000. Some lenders will bundle federal and private student loans all into one package, but, the federal loans lose their forgiveness and repayment options if combined with private loans. For this reason, many encourage parents and grads to refinance/consolidate private and federal loans separately.
On top of this, private refinancing companies often have differing underwriting criteria, so researching different lenders is a key step towards refinancing. Your options can get confusing sometimes, but a guide to different refinancing lenders is the perfect way to get on your feet and running with your loans.
- Personal Loans
There are some unconventional ways to pay for college, such as borrowing from a Roth IRA, and another option to consider is securing a personal loan instead of student loans. As most personal loan interest rates are higher than student loan rates, the only way this might make sense is if you are a homeowner willing to exchange equity with a Home Equity Line of Credit (HELOC). A HELOC loan is a variable interest rate loan, but, applicants with excellent credit can be approved for interest rates in the mid-3% to 4% range.
Using a HELOC to pay for college might be the modern equivalent of “betting the farm” and missing payments can cause the bank to ultimately seize your house as collateral. So, the additional risk might not be worth the potential savings in interest compared to traditional parent education loans.
- Loan Forgiveness
One final option is loan forgiveness programs. To qualify, you need to have federal loans and work in select career fields. Serving in the AmeriCorps or Peace Corps are two options, or working for a government agency or qualifying non-profit organization. Forgiveness terms vary on the type of federal loan, however, as a general rule of thumb, you have to pay consistently for 10 years (120 qualifying monthly payments) and any remaining balance will be forgiven.
As the repayment for most student loans is 10 years, the federal loan forgiveness option can be very beneficial for grads working in low-income positions.
No doubt about, college is expensive and paying for it can be even more expensive. Each family has a different financial situation and emphasis on who should pay for school, but, college should never cost more than it has to.
When it comes to student loans, parents and students can start saving money by applying for loans with the lowest interest rates and filling out the FAFSA to receive a financial aid package. It might be possible to get a lower interest rate during college by selecting an interest-only loan and only electing to defer borrowed principal payments until after graduation. And, enrolling in automated payments will save you a quarter point on all loans.
After graduation, I recommend using any additional income or cash windfalls to payoff the loans as soon as possible. It is also a good idea to consider refinancing if you can get a lower interest rate or simply need a reduced monthly payment to make ends meet. Just remember that if refinancing extends the repayment terms beyond the length of the original loan and you only make the minimum payment, you will end up paying more in interest than with the original loan.