K
  • July Article: Financial Planning

    How They Affect Your Postgraduation Income

    By Crystal Gifford, Full-Time Faculty 
    Published July 2014

    Students often begin their degrees with an idea of what life will be like once they graduate. They consider elements like their future income and the lifestyle they will be able to afford. One factor that is often not considered in this postgraduation lifestyle assessment is how much they will be paying for student loans. Loan payments are often a large part of the budgeting process that is too readily forgotten when dreaming up the ideal career a degree allows someone to pursue.

    Many factors, including the loans’ type, amount, payback period, and interest rate, affect student loan payments. The following paragraphs address each of these issues and how students can prepare in advance to minimize the effects of student loans on their postgraduation lifestyle and accumulation of wealth.

    First, the total amount of the loans by the time graduation occurs can vary depending on the type of degree, the institution and costs associated with it, and how much the student relies on loans for extra expenses beyond tuition. In order to minimize the amount that needs to be repaid, the student should participate in the payment of tuition while in school, if possible, as well as reduce their overall expenses while obtaining a degree. Borrowing or buying used books is one great way to reduce overall costs. Additionally, finding breaks within the institution such as work-study opportunities or fellowships may also reduce the costs of education, therefore reducing the amount of loans that must be taken out. Most importantly, students can return any funds that are awarded in excess of actual needs. Keeping these funds often results in unnecessary spending, and doing so is essentially borrowing from your future lifestyle to improve your lifestyle while in school. This can be a very expensive way to fund a lifestyle and it may take years to pay it all back.

    The second thing that affects student loan payments is the time it takes to repay the loans. Taking longer to repay the loans reduces the payments per month, but means it will take longer to pay off the loans. Assuming you do not have other debts at higher interest rates, it can be beneficial to pay student loans off as quickly as possible. If other debts have been incurred at much higher rates, it may be best to extend the student loan repayment schedule as much as possible and focus on the other debts first. Student loan interest, like mortgage interest, is tax deductible. Consider this when consulting your financial planner for the best use of your funds toward debt repayment.

    Next, consider the types of loans you are taking out before you plan that postgraduation budget. Private loans are often more expensive, but federal loans can also be expensive. If you have subsidized loans, you will not have to go back and pay interest that would have accumulated while you were in school. However, when a loan is unsubsidized, it means that interest is capitalized (i.e., added to the amount of your loan principal) and becomes a part of the amount you must pay back. According to The Institute for College Access & Success, 40 percent of student borrowers could be using more affordable federal loans (May 2014). The cheapest loans are often the subsidized, federal loans and the most expensive are usually the private loans. The more expensive your loans, the more they affect your postgraduation lifestyle and wealth accumulation.

    Finally, interest rates have the greatest impact on the overall cost of student loans. The higher the rates, the more you will pay back over time and the higher your payment will be while you are paying back the loans. The 20072008 credit crisis also created a marketplace of increased costs to students for loans, with high origination costs and higher annual rates resulting in much higher costs to paying off the loans accrued during the degree process (Overture Technologies). Higher interest rates across the board leave students graduating with less satisfaction concerning the lifestyle improvements expected upon graduation, and can even make all that hard work feel less rewarding.

    One way to overcome this dreaded student loan lifestyle infringement, especially in those early years when income is not quite what you may have hoped it would be, is to work with companies the federal government now supports to help reduce the overall costs of student loan debt. One such company called Student Loan Consolidation Services (www.studentloanconsolidationservices.org) walks graduates through the process of reducing the overall cost and drastically lowering the payments of their student loans with a federally backed program endorsed by the Department of Education. Students can take advantage of this by visiting their website and signing up for a free evaluation.

    In all, the combination of reducing costs, making the best choices for you during repayment based on the overall amount of debt you have, choosing the most efficient types of loans while in school, and reducing interest rates is the best way to protect yourself from having your wealth and lifestyle reduced by the burden of student loans. When in doubt, seek professional help, such as the Student Loan Consolidation Services team mentioned above and a skilled financial advisor to guide you to the best plan.

    References

    The Institute for College Access & Success. (May 2014) “Private Loans: Facts and Trends” Retrieved May 27, 2014 from http://projectonstudentdebt.org/files/pub/private_loan_facts_trends.pdf 

    Overture Technologies (2012) College Money Insider. “Recent Trends in Private Student Loans” Retrieved May 27, 2014 from http://www.overturemarketplace.com/articles/recent-trends-in-private-student-loans 

    Student Loan Consolidation Services (2014). Retrieved May 27, 2014 fromwww.studentloanconsolidationservices.org 

     

     

    Crystal Gifford is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.

     

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