In this edition of the Student Loan Plan, we look at ways Steve and his son can manage their combined student debt. Steve borrowed Parent PLUS loans and his son also took out loans. If you want tips for dealing with your student loans, contact us.
My son just graduated with an engineering degree. Unfortunately we have borrowed a lot to make this happen.
We have approximately 34K in Stafford loan (unsubsidized and subsidized) as well as 112K in Parent Plus loans.
This seems daunting but the graduate has a good job out of the gate at 68K annually to start (with unlimited OT) and has a very strong work ethic. We both have good credit scores as well
Based on this we’re thinking of refinancing going the private route to get a low interest rate. Between himself and us we think we can get these paid down quicker than a traditional payment plan would provide
Was hoping you could give us your insights as to the best course of action/ recommendations moving forward.
While the cost of this engineering degree was extremely high, it appears that Steve and his family made a solid investment as the first job out of school sounds pretty lucrative.
Putting together a plan in this case will be very challenging. The issue here is that there are many different ways to deal with this debt, and there is no clear right answer. As a result, we are first going to discuss some questions that must be answered as a family. Once we have answers to the important questions, we can move on to some of the ways to put a plan into motion.
Questions to answer
Who will be the person, or people on the hook for all of this debt? It sounds like the son has his name on about 34k worth of debt, while the PLUS loans are in the name of the parents. If things stay this way, it is a huge burden on the parents, even if the son is making all of the payments. The more debt you have to your name, the harder it will be to buy a home or get any other sort of loan. (Note: We can’t exactly just swap the debt from one person to the next, but we do have some ways of shifting it in certain circumstances.)
Will any of us ever take advantage of the programs associated with the federal student loans? It sounds like the family is doing well on the income and credit score front, but when you owe close to $150,000; there is a lot to consider. The two biggest perks to keeping your loans with the federal government are the student loan forgiveness programs (such as public service) and income driven repayment plans (such as IBR). Though there are some limitations to the PLUS loans, they still have better perks than what will be available on the private market.
Once you know these important answers, it is time to take the next steps
Putting the Plan Into Action
In this case it sounds like the family has already decided to forgo the federal perks and jump into the private refinance marketplace. Families that have not elected to refinance should consider the many alternatives available to Parent PLUS loan borrowers in repayment.
The key for Steve and his son will be to do lots of shopping around.
The important thing to remember about shopping around is that the numbers lenders give you are based strictly upon a computer program. This is something that is nearly impossible to negotiate. Instead, collect as much data as possible to find the most efficient route for paying off the loan.
The following tips should help:
- Try many different lenders – We have found twenty companies that are actively advertising student loan consolidation services. Because each lender has slightly different programs and requirements, it is critical to shop around to find the best rate for your circumstances.
- Find out all options with each lender – Does the lender consolidate Parent PLUS loans? Is getting a co-signer going to be necessary and how much will adding one save? Is there away to get the debt out of Steve’s name and into his son’s name? What options are available if you fall behind on the payments? What repayment lengths are available and how do the different lengths change interest rates? (Tip: Getting answers to the rate related questions will likely require a credit pull, so be sure to do them all in a tight window so that it is considered shopping around for credit scoring purposes.)
- Student loan consolidation is not the only path – There are personal loans that are at times easier to get, but they often have higher interest rates and the amount that can be borrowed is also limited. Home equity loans offer some very low interest rates, but there is huge risk behind putting your home up as collateral. Keeping the loans with the federal government is always an option, but with the great federal perks usually come higher interest rates.
- Chart your different paths – Excel can be a great tool for this exercise, and your recent engineering grad should have no problem mapping the data. Based upon the information learned from the lenders, look at the available repayment plans and how it would affect the monthly budget. Pick a plan that gives you some flexibility, but that still aggressively pays off the loans.
Family and Money
Mixing finance and family can be a very combustible issue. Part of the reason we encourage discussing all of these issues and talking about different routes is to make sure that everyone is on the same page. Student loans are already stressful and at a high balance, the stress only grows. Working together to find a plan that works for everyone can help avoid unnecessary surprises and hostility.
The Bottom Line
This article reads like a long homework assignment. It should. Right now you have a ton of options from repayment plans to lenders to work with. Getting this addressed in the best way will take a lot of time and answering of tough questions. With well over a $100,000 at issue here, the slightest improvement to interest rate could result in a huge savings in the long run. Put in the work now and reap the reward for your efforts for years to come.