Parents say they want their children to graduate from college debt-free. While at the same time, many of these same parents are also underfunding their own retirement accounts. But if you understand how government-issued (federal) student loans work, your children will not end up having to support you in retirement.
Graduates who go into the Army, Vista, or the Peace Corp—or other eligible government services—can have a big portion of their loan balances completely forgiven. This is also true with some teachers, government workers, and employees in the non-profit sector. All of these workers can have their loans forgiven in just ten years.
Your loan payments can be set at the same low monthly rate whether you owe $20,000 or $80,000. Under the government’s “Pay As You Earn” Repayment Plan, you are only required to pay 10% of discretionary income each year. When you factor in the Forgiveness Provisions just discussed, a worker may end up paying less than half of her loan balance and have the remainder completely forgiven after as little as ten years.
Despite the generous forgiveness and payback provisions mentioned above, if you have excess funds available, you’ll want to opt for the government’s Standard Repayment Plan. Under these circumstances you want to pay off your loan quickly and save on the interest payments under the extended repayment programs.
These are the two programs that offer the flexible payback options just described. Though it would be great if your student could work to pay for a portion of his or her college expenses, it may not be worth it. Any student income in excess of about $6,300 gross is assessed at 50% under the Federal EFC formulas. Considering their great flexibility, it’s much better to encourage your student to have “skin in the game” through these Federal loan programs.
You never know when the rules of the game will change. A new administration in Washington, D.C., or a new majority in the House or Senate can mean a change in the rules. It takes time and energy to keep up with the constantly changing legislation, but it’s something you must do if you are going to win the game.
The government’s collection rate on defaulted student loans is about as good as your local loan shark’s. They always get their money and they have all the resources at their disposal to do it. Not only will they garnish your wages but they’ll also collect what you owe them through the Internal Revenue Service (IRS). Defaulting is certainly not the way to get out of your student loan.
Interest rates balloon on most private loans and you can end up paying so much interest that you can feel buried by your debt. Private student loans usually require a co-signer, which can mean that the parent is on the hook for even more college debt. Don’t be fooled by the “teaser” interest rates.
Less than 30% of student borrowers have a clue about the most advantageous ways to pay back their student loans. Your accountant, your school counselor, or your trusted financial advisor should know the best options currently available for paying back a student loan.
Though this advice may sound counterintuitive, unless you enter the workforce with a very high salary, it’s usually best not to accelerate payments. There are just too many options—including complete forgiveness of your loan in ten years if you are teaching, or working for the government or a non-profit.
The media is constantly reminding us that student loan debt now exceeds $1 trillion dollars. Parents become frightened when they read this, and often advise their children to avoid loans altogether, even if it means that the parents have to dip into their hard-earned retirement savings to pay for college. They don’t realize that we have the most generous student loan program in the world.
The U.S. now has the most generous student loan repayment program in the world. The problem is that almost 90% of the public, the majority of the news media, and even most members of Congress don’t seem to know about it. Though I would never recommend that students borrow more money than they can afford to pay back, I would also never recommend that parents decimate their retirement savings to help their students pay for college. With this very generous program, you may not have to do either.
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