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Your Options For Paying Back Your Student Loans

By Erik Folgate

I graduated from my undergraduate degree at the perfect time. Consolidation federal student loans rates were at an all-time low. I locked in a consolidated rate of 2.75% for the life of the loan! It was awesome, because I have already saved thousands in interest with a rate that low. Yeah I know, i’m rubbing it in your face if you graduated this May. The best consolidation rates you’ll find this year are in the 6 to 7% range. More than two-thirds of college students leave with student loan debt, and the average bill they are carrying is $19,200 according to the Department of Education. There’s an obvious need for recent graduates to be counseled about what to do with their student loans. I am only one person, and I’m not an certified financial counselor, but if you want my opinion, that is what I will give you.

Consolidating is still the way to go, with caution.

You may not save much on interest payments by consolidating your loans at the current rates. But, I would encourage you to shop around for a good, private consolidation loans company. College Loan Corporation is a credible college loan consolidation company, and I have heard that their customer service is pretty good. There are three reasons why I would consider consolidating even though the initial math might not equal much savings.

  1. It simplifies your life. Loan consolidation puts all of your payments into one lump sum payment. You don’t need to keep track of 6 to 8 different payments you need to make every month.
  2. You can still get your rate down by up to 1.25% with certain incentives. Generally, most consolidation or refinance companies will knock off .25% for setting up automatic withdrawals from your checking account. This one is hard to swallow for only a .25% reduction. There may be a time when you don’t have the money in your account, and then they get angry when they can’t pull the money out. I would watch out for this, but if you are disciplined enough to have them EFT your account, go for it. Also, if you make your first 12 payments on time, they will knock off 1% after one year. This is a nice rate reduction. You’ll see a nice savings by knocking a point off of your consolidation.
  3. You can negotiate a little bit with private consolidators to help get you the best rate with incentives to lower the rate. It is a very competitive business, as you will see with the barage of junk mail you begin to receive in the next six weeks. Don’t think that they won’t negotiate a little bit with you, and many of the customer service representatives are very accommodating. Remember, they’re salespeople in this instance. They want your business, so they are willing to work with you.

The Bottom Line…

Pay off your student loans as quickly as possible. Develop a plan to pay them off within a certain amount of time. Don’t settle for paying them off in a 10 or (gasp) a 20 year period. Those loans will begin to feel like the roommate that you can’t get rid of. My suggestion is that if you have some other smaller debts such as credit cards or other small bills lingering around, clean those up and get them paid off before you start tackling the big, hairy student loans. This will allow you to focus more on paying them off with bigger payments that knock down the principal balance quicker.

Don’t be overwhelmed when you see the size of the loan. Even though it only paid for a piece of paper, the knowledge and experiences that you gained will help you be a more productive and valuable asset in the working world. Whether it’s working for a large corporation or owning your own small business, a college degree is valuable even though it’s not necessary to succeed in life. So keep your chin up, and start chipping away at Sallie Mae!

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • Thomas

    I am lucky enough, like you, to have consolidated my student loads at around 2.5% (I don’t remember exactly what it was).

    For people in our situation, I do not agree that the loan should be paid off immediately. I earn 4.5% interest on they money that I would have used to pay off the loan from ING, and I get a tax deduction on some of the interest I pay on my loan. In addition, prompt payment of a loan every month shows potential creditors that I am a reliable risk. I still have 12 years left in my loan and I am planning on letting Sallie Mae continue to automatically withdraw a few hundred each month.

    Just a thought for those of us lucky enough to lock in a lower rate.

  • Thomas

    Upon re-reading my comment, I don’t think I was clear enough. I completely agree with you that anyone currently graduating should try to pay off the loan as soon as possible, but anyone stuck in a low-interest situation would be better off earning a higher interest rate on their money than they owe.

    I really enjoy reading your blog and you have some great advice. Take care.

  • http://frugallawschool.blogspot.com/ Mike Maguire

    This is a great article and should hopefully help me as I prepare to take out loans for law school.

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  • erik.folgate

    Hey Thomas,

    I appreciate your opinion, and this blog is set up exactly for that. I don’t claim to have all the answers or think that all of my opinions about money are the correct opinion. However, I have to disagree with you about this one.

    I would always suggest that someone pay off their debts as quickly as they can. The reason for this is the elevated factor of risk that is placed into our lives when we have debt payments. If you are satisfied with paying $200 bucks a month for the next 10 years, a lot can happen in 10 years. What if you lose your job while your wife is pregnant? What if a medical emergency occurs that requires some significant out-of-pocket expenses. Insurance helps, but these situations can cause some extraordinary financial burdens. Now, you have to put those student loans on hold to pay for other things, and your credit is destroyed and creditors are calling you every day. If you had paid off those debts early, you wouldn’t have to worry about them when the worst happens. I’m not trying to be pessimistic, but it is naive to think that financial hardship won’t happen to you or me.

    When we keep debt lingering around, it increases the risk in our financial lives.

    Second, why would you ever borrow against your own money? What you just described to me is no different than saying you have $10,000 in the bank. You want to start a small business with $10,000, but instead, you take out a $10,000 loan at the bank at 8% interest, because you are making 10% on the $10,000 in your bank. Is the 2% net gain really worth it if the worst happens? The worst would be that you take the $10k in the bank and pay for a new roof on your house, then your small business fails due to a shift in market demand. Now, you owe $10k, but the $10k in your bank account is gone. If you had paid the $10k for the business up front, you could have patched the roof to hold you over for another year or so, and stayed out of debt. Does that make sense?

    It’s your money, and you can play the interest game, but know that it increases the risk in your life and risk is a calculable variable that decreases the net gain of an investment.

  • mike

    Is there anything I can to reconsolidate my student loans to get them out of collections now that I can make payments. I have called the collectors and they want me to put ahuge down payment and then after 12 months of good payments they will take them out of collection status. Is that my only option???

    Please help!!!

    thanks!

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  • http://www.collegeloan.com Anonymous

    If you are in a public service job, remember there is a new public service loan forgiveness program now available through the Department of Education. You need

    http://studentaid.ed.gov/PORTALSWebApp/students/english/PSF.jsp

    More information on managing your student loan debt:

    http://www.studentbank.com/after-college/manage-student-loan-debt/

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