Student loans require homework

Michelle Singletary
Columnist May 22, 2012

During a recent online discussion, lots of people had questions about student loan debt. Here are my answers to a couple I didn’t get a chance to address.

One person wanted to know whether when carrying student loan debt — in this case at 7 percent — you should dip into your savings to pay it off. The reader wrote: “The debt would be paid off in a year at my current payment rate. Since the interest rate is so high, I’d like to raid my savings to just be rid of it. My job is stable, so otherwise I’d keep my savings just in case I had a car repair, a needed new roof, etc. What do you think?”

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

I’m an advocate of getting rid of debt as soon as you can — ­unless you feel you’re in jeopardy of losing your job or you know there’s a big expense to cover soon. Otherwise, why hang on to the debt like it’s a pet rock? Why put out the extra money in interest, especially if your savings aren’t earning much in a bank account?

In this case, the person won’t completely drain his or her savings. So pay off the student loan. Lift that weight off your shoulders a year early and then take the money you were paying on the debt and rebuild your savings.

And while one person is getting rid of student debt, another asked about taking it on.

“I’ve been putting my niece through college and now I’m getting to the point where we’re going to have to look for more ways to finance it,” the reader wrote. “It’s not an option for her to move closer to home and transfer schools, so I’m wondering how student loans work. She has two loans through the school, but are there other loans she can get? Or is the only other option to take out personal loans from a bank?”

I can’t skip over the fact that this person is helping out a niece. How magnanimous. My husband and I helped pay for some college costs for two of our nieces.

But I have to ask: Was there ever a long-term plan for how you were going to cover the costs over the years?

I’m guessing the answer is no. Had the reader had this discussion, it should have been factored into where the niece attended school. A closer school where the student could commute would have been financially wiser — at least trimming the cost of room and board. I bring this up not to make the relative feel bad but to help others facing a similar situation.

You have to map out how college expenses are going to be covered over the four or five years (and in some cases six) the student will be in college. If you don’t plan, you’ll end up like the person now fretting about how to keep a niece in a school she can’t afford.

In the case of one of our ­nieces, she attended an in-state college to keep the costs down. And although we paid her tuition, room and board for the first year, we all decided that she would move home and commute after her freshman year. We wanted her to have the on-campus experience for at least one year.

As it turned out, my niece’s parents got their finances together and they were able to take over her tuition expense. But they didn’t take out loans. Instead, they took advantage of the college’s monthly tuition payment plan. Many schools offer installment plans that are often interest-free and divide the costs into equal monthly payments.

Don’t make loans your first and only option. Besides the installment plan, look each year for scholarships and grants. Also don’t rule out a transfer to a more affordable school. Often people reject this option because they’re concerned that costly credits won’t transfer. However, you may be surprised to learn that most if not all credits can be transferred. Here’s a resource that might be helpful: collegetransfer.net

Registration on the site is free, and it’s an online resource intended to help make the transfer from one school to another easier and less costly. Particularly helpful is information the site collects on many schools’ transfer policies.

I hope parents and their high school students heading off to college are paying attention to all the stories during this graduation season about college students loaded with debt. I hope the struggles of others scare them away from borrowing so much for school.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Or e-mail: singletarym@washpost.com. Personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated. To read previous Color of Money columns, go to postbusiness.com .

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