One of the financial experts I highly respect when it comes to financial advice is Suze Orman. A lot of what she advises when it comes to money and financial freedom just makes common sense. One of her most recent email blasts had to do with offering advice to college graduates with student loans - what they need to know.
In her email, she warned that being delinquent in paying back student loans is one of the most damaging financial mistakes one can ever make. The penalties and fees that will be tacked on to the original loan amount due can add up to many thousands of dollars. Making things worse, there is pretty much no avenue to take to to avoid this obligation because student Loans are almost impossible to get discharged in bankruptcy court. In addition, at retirement age if you still have a federal student loan balance, Uncle Sam can seize a portion of your monthly benefit.
Suze's advice is to get in front of your student loan(s) immediately. If you don't, the road to financial freedom may be a very bumpy ride or worse.
Here is how to deal with your federal student loan repayment test. (if your student loans are private, make contact with your loan servicer immediately so that you are fully informed about when and how much you must begin repaying).
- Begin repaying your loans within six months of leaving school. You have a six month grace period from when you leave school before you need to begin repaying a Federal loan. However, the interest on the loan will continue to accrue, adding to the total balance if you have an unsubsidized Stafford loan. Start making payments immediately to begin chipping away at the loan balance.
- Haven't found a job? It Doesn't matter! Payments still need to be made or you should request a delay. Again, the government expects you to begin repaying the loan within six months of graduation. If you have not found a job, have an illness or will be going back to school for further education, you can apply for a deferment or forbearance, where the payments may be suspended. However, you need to remember that the interest keeps piling up. You can find out more about student loan deferment and forbearance
- Strive to repay the loan in 10 years. There are several repayment plans available to spread repayment out over 20 or 25 years if you qualify under specific income-eligibilty conditions. However, Suze does not advise taking this route because you will owe much more interest over the life of the loan. Even though a remaining balance after 20 or 25 years may be discharged, the entire amount discharged will be reported to the IRS as taxable income. So, you may find yourself faced with a huge tax bill. An exception might be if you plan on making your career in public service. In this case, a longer repayment plan may make sense (see next step)
- Take advantage of a longer repayment plan if you will take a job in Public Service for a minimum of 10 years. The Public Service Loan Forgiveness Program, allows for your loan balance to be forgiven after 10 years of payments (120 on-time payments). In addition, you will not be taxed on the amount forgiven. For this reason, it does make financial sense to apply for an income-based repayment plan with a longer payback period.
- Make payments automatically. To avoid ever being late on repaying your student loan, you should set up direct automatic payments from your bank to your loan servicer. Being late is an expensive mistake that can be difficult to recover from.