The Moans and Groans of Student Loans
When I graduated from college I thought I had all my finances under control. Sure I had some student loan debt, but I had been able to get through four years with only the equivalent of one year’s worth of expenses and tuition in debt; compared to those with hundreds of thousands of dollars in student loans, I felt pretty good. Then I entered the “real world” and everything changed. I’ve been out of school four years now, paying the optimal monthly payment on my loans every month, and I’ve barely made a dent.
As a student applying for loans, I assumed that as long as I made my monthly payments I would see the number go down, plain and simple. I figured that those high school teachers I had that were still paying down their loans in their 40s must have put off payments or took out enormous loans; why else would it take that long? As the reality of the situation sunk in, and I realized the impact of this magical “interest rate,” my student loan debt suddenly felt much heavier. And I’m not alone. According to a recent survey conducted on behalf of the AICPA by Harris Interactive, only 39% of respondents fully understood the burden student loan debt would have on the future, and a whopping 75% have made a personal or financial sacrifice because of monthly student loan payments, like postponing getting married, having children, buying a house and saving for retirement.
This spring I proudly watched my little brother graduate from college, but as I looked out at the sea of graduates, my mind couldn’t help but think of the immense amount of student debt that lay before many of them. Lucky for my brother, working at the AICPA and with our members has given me access to a treasure-trove of tips and information for managing and paying down student loan debt. Here are a few basics that I passed along to him from 360 Degrees of Financial Literacy.
- Remember the grace period. Thanks to the grace period built into most student loans, you'll likely get from six to nine months after graduation before you need to begin repaying your loans. This time can allow you to get financially settled (at least partially) and examine your options before repayment begins.
- Understand your repayment options. Many lenders offer flexible repayment plans to help students manage this large financial responsibility. Common plans include: standard repayment, graduated repayment, extended repayment and income-based repayment. To pick the best option, you'll need to determine the amount of discretionary income that you have to put toward your student loan each month. This, in turn, requires making a budget and tracking your monthly income and expenses.
- Ask about discounts. Some lenders offer special discounts for prompt loan repayment. For example, they may shave a percentage point off your interest rate if you allow them to automatically deduct payment from your checking account each month. Or, they may waive some monthly payments after receiving on-time payments for a certain length of time.
- Consider a deferment, forbearance or loan cancellation if you can't pay. At times, you may find it financially difficult or impossible to repay your student loan. The best thing that you can do is contact your lender and apply for a deferment, forbearance or cancellation of your loan. You'll need to fill out the appropriate application from your lender, attach any supporting documentation and follow up to make sure that your application has been processed correctly.
- Keep track of your paperwork. Repaying student loans is a serious matter, and you'll need to stay on top of it. It's important to keep accurate, accessible records. Open a file folder for each loan, and file any accompanying paperwork there, such as copies of promissory notes, coupon booklets, correspondence from your lender, deferment and/or forbearance paperwork and notes of any phone calls.
- Investigate the student loan interest deduction. On the bright side, you might be able to deduct some of the student loan interest that you pay on your federal tax return. If you paid $600 or more of interest to a single lender on a qualified student loan during the year, you should receive Form 1098-E at tax time from your lender, showing the amount of student loan interest you've paid for the year. For more information, see IRS Publication 970.
What guidance or tips do you offer your clients who are handling student loan debt? Did you have any realizations when managing your or your child’s student loans that allowed you to better assist others?
Claudia Cieslak, AICPA Staff.