Managing the debt
As your child finishes up her college career and looks forward to her next steps, it's a good idea to discuss what's coming. Even if you had a 529 education savings plan for her education, chances are you needed a loan to make up the difference. If your child's new financial responsibilities include paying off student loans, you'll need to make a plan.
First things first: Be sure you and your child know when payments are due and how long it will take to repay the loans.
When to start paying
Most federal student loan payments kick in when a student leaves college or drops below half-time enrollment, although many have a grace period of about six months. The loan servicer or lender should provide information about the first payment due date, full repayment schedule and monthly amount.
Pick a target end date
Federal loans typically use a 10-year repayment plan unless you pick a different schedule. You can also figure out a higher payment amount that will get the loan paid off sooner, which creates big savings. Your financial professional can help design a plan to pay the loan off early.
Having a smart strategy for managing payments can go a long way toward paying the loans off faster or just making the repayment process easier.
Set up a dedicated account
You can create a separate bank or money market account and make your automatic loan payments from there. This strategy can be a smart way to avoid costly late payments and stay on track for full and timely repayment of the loan.
Adjust the monthly due date
Does your or your child’s salary or another regular paycheck come in at a certain time of the month? You or your child can contact your loan servicer to change the day a payment is due and help sync it up to incoming payments.
Pay a little extra when you can
Paying even a little extra, such as another $50 or $100 in each payment, can add up to significant savings over time. Another trick is to divide the monthly payment in half and send two payments per month — this strategy actually helps chip away at the loan’s interest and can help you repay it faster.
Make it automatic
Take yourself off the hook for remembering your payment due date every month. Instead, you can keep your repayment progress on track by setting up auto-deposit for your loan repayment amount into your dedicated account with every paycheck.
If necessary, you can adjust the terms of your student loans through refinancing or other programs.
Use 529 assets
Certain student loan payments are now considered a qualified education expense. If you still have money in a 529 account, you can use a lifetime maximum of $10,000 toward paying the student loan of a beneficiary and each of the beneficiary's siblings. Remember, you can change beneficiaries on a 529 account. If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.
Explore refinancing routes
You may be able to refinance your loan to get a lower interest rate. This strategy might be particularly smart if you have several loans that can be wrapped into one new loan. But be careful — extending the length of the loan to lower the monthly payments could incur even more interest charges. And try to find a lender that offers protection, such as forbearance or deferment, similar to a federal loan.
Know and manage risks
A financial professional can help you and your child create a repayment strategy that works for your current situation.
Research options to reduce the loan
College loan repayments can often be revised, reduced or even eliminated. You can ask about getting a repayment plan based on a percentage of your or your child's future income, which could make the loan more manageable. Also, there are government-sponsored programs that can reduce the loan through certain public service or teaching jobs.
Work together
For cosigned loans, if one borrower stops making payments, the other borrower is still on the hook for the entire debt.
It’s difficult to get out of a college loan, even through bankruptcy, so it's better to manage potential risks now rather than deal with possible consequences later on.
