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Is It Smart To Use Your Retirement Money For Your Child’s Education?

golden egg with moneyDo you think that it is a smart move if you use your retirement money for your child’s education? After all, no parent would want to see their kid suffering financially. But does that really mean you need to sacrifice your future just so they can start their own future without any debt?

It is very hard to save for retirement when drowning in debt. That is a fact. So before you do the selfless act that comes naturally for parents, you may want to reconsider using up your retirement funds just to save your kid from student loans.

Although it is the noble thing to do, it may not be the smartest. According to an article published on, Boomerang kids are threatening to ruin their parent’s retirement. When they start moving back to the house or passing on the burden of paying off student debt to their parents, they are endangering the retirement of their folks. This report was taken from the market research done by Hearts & Wallets and shared with CNBC. According to this study, a lot of the parents of boomerang kids are postponing retirement just so they can help support their kid. And what is more troubling about this news is that those who are doing it is part of a big group. In fact, more than one-third of baby boomers provide financial support to their kids – that amounts to 15.8 million households. That is said to amount to $8 trillion worth of assets that could have been invested.

If you are seriously thinking about using your retirement money to help you child avoid debt, you may want to rethink your options first.

Should parents use their retirement fund to keep their child from student loans?

There is an article from that discusses this topic. According to the author, parents should not endanger their retirement money just so their kids will be spared. In fact, the article suggested that parents should start saving money early on to take advantage of the compound interest of some college savings funds. They can start early, save a little each month, and still have more than enough to help keep their kids from college debt when they are older. At the very least, this move will help put some money on the table to minimize the need to borrow money.

In our opinion, it is really not smart for parents to use their retirement money to fund the education of their child. So the answer to the title of this article is a big NO. There are two important reasons why parents should be encouraged to be a bit selfish when it comes to their retirement funds.

You deserve to give yourself a bright and comfortable future.

First of all, you really have to reward yourself for all the work that you have done and will still be doing in the future. You are not only working for your own needs, you have been supporting your child during the first 18 years of their life too. That is not an easy task considering the financial difficulties that everyone experienced in the past few years. Although parenthood requires sacrifice, there are some things that you also need to do for yourself. It is true that it is your responsibility to ensure that your child is equipped with the education that will help them support themselves financially in the future. But that does not mean you should choose between your future and theirs. If you want to be logical about it, there is more at stake with your future because you only have so much time to turn things around. You child still has a long way to go to pay up their student loans and save up enough retirement money. You do not have that luxury. That is why it is okay to be selfish by putting your retirement needs first before that of your child.

You need to teach your child how to pave their own way.

Another reason why you should not use your retirement savings to fund your child’s education is because you need to teach them to be responsible with their money. Times are hard. It is not like you are in abundance now. You need to let your child experience that reality. An article from finds fault in the way baby boomers practiced the concept of helicopter parenting. This means they try to micromanage the routine and behavior of their child. Their intentions are good because they only want to pave the way for their child to experience success. However, the methods used are not really teaching their children to own up to their lives. Too much sheltering will leave you with a child who will always be dependent on you. Do you really want that on your plate while you are retired? More importantly, can you really retire if your child continues to depend on you?

How to help with college finances without compromising your retirement savings

Of course, as a parent, you will not really leave your child without any help. You will assist them to ensure that they will not graduate from college drowning in debt. However, you need to think about how you can do that without compromising your own retirement money.

Here are a couple of tips that we have for you.

  • Guide your child in selecting the right loan. If you are not going to use your retirement funds to finance the education of your child, that means they would have to borrow student loans. There many options to get financial aid. You need to be patient and sit down with your child to discuss with them their options. Make sure that you research not just the type of loans that they can borrow, but the repayment options too. You need to make a decision on the loan based on how easy it will be to pay off in the future. In essence, educating them is more beneficial than using your retirement money.
  • Teach your child how to manage their money wisely. Once you have helped them select the right loan, the next lesson you need to teach them is money management. What they will learn from you will be something that they can carry with them until adulthood. When it comes to teaching your child about proper financial management, you can start with budgeting, saving and smart spending. You should discuss with them credit and how to manage it properly – especially if you will allow them to use credit cards.
  • Let your child work part time. Apart from teaching them how to manage their money, you should also encourage them to work part time. A college student has a lot of time in their hands – even those who have a full load. Help them seek out job opportunities so they can keep the need for loans to a minimum. If they can pay for their board and lodging plus daily needs, they only have to borrow money for their tuition. That will keep the student loan from being too burdensome. Not only that, they will learn how hard it is to earn money – that will teach them how to practice smart spending.
  • Split the expense with your child. Of course, you have the option to split the expense with your child. Choose a comfortable amount based on how much retirement money you have. When we say comfortable, it has to be an amount that you know you can replace before you retire. You can offer to pay for the tuition of your child for the first two years and then let them borrow or work for the money to pay for the rest.

Keeping your child from student debt problems is not really that hard. Sometimes, all you really need to do is to educate them to help them make smart decisions about their loans. It does not really require you to spend anything but you will be giving them something much more valuable – your time.

Tips For Picking The Best Student Loan

student loan debtIf your child is a senior in high school we don’t have to tell you that it’s now the season for college financial aid. This means that among other things if you haven’t yet completed and submitted your FAFSA (Free Application for Federal Student Aid), you need to get cracking – even if you’re not yet sure whether or not federal aid will be the best option for your child. Most students do choose to get federal aid because the loans provided by the US Department of Education generally have the best interest rates and offer a number of attractive repayment options. But today, some of the banks that provide private student loans have made changes that make their loans more appealing. This can be especially true if you or your parents are creditworthy. In this case a private loan might have a better interest rate than those of federal loans.

Note: If you’d like more information on filling out a FAFSA and what to do to get the maximum amount of federal student aid, watch this brief video courtesy of National Debt Relief.

Why have the private lenders made changes in their loans?

There are several reasons for this. First, there has been a lot of pressure on these lenders to make changes. Second, it’s because they are looking to attract young customers that may be with them for their lifetimes and will eventually need mortgages and other financial products. Some of these lenders are now offering refinancing options that can actually lower the interest rate on student loans as well as modifications designed to help those of their borrowers that are having a tough time making their payments.

When you should get federal loans

If you’re borrowing on your own with no help from your parents, your best bet will always be federal loans. They’re cheaper because everyone gets the same fixed rate. Also, as mentioned above they have better repayment terms. If after you graduate you find that you are unable to repay your loans because you’re unemployed or have a low salary, you could qualify for repayment options that would keep you out of default. Also, federal loans could be a much better choice if you find you need to modify your payments after you graduate. Are you going to school to become a teacher or social worker? Federal loans offer a number of benefits including loan forgiveness in public-service jobs. With this translates into is that you would not have to pay back the full amount of whatever you borrow.

Hope you’ll get subsidized loans

The best federal loans are those that are subsidized. This means that while you’re in school the federal government will pay the interest on them. This includes both Stafford loans and Perkins loans. However, they are needs based meaning that you will have to demonstrate a financial need. If you qualify you could get a subsidized Stafford loan for the next school year where your interest rate would be just 4.66% plus an origination fee. However, be aware that there will probably be an interest increase on Stafford loans so that Perkins loans may once again be the cheapest federal education loan.

When a private loan might make sense

If your parents have a credit score of around 740 on the FICO scale a private loan might make sense. The reason for this is that if your parents were to get a Parents PLUS loan or if you’re a graduate student and need one of these loans the interest rate will be 7.21% plus an origination fee. If you go to a private lender you should qualify for a better rate. Be sure to note whether the loan has a fixed or variable interest rate. One of the best things about federal loans is that their rates are fixed. On the other hand, loans from private lender have both fixed and variable rates. The variable rates are the lowest just as they are with variable rate mortgages. However, this means the interest rate could increase in the years ahead. If you want a ballpark estimate of the interest rate you would pay over the lifetime of the loan just add four percentage points to the variable interest rate you’re being offered.

Compare the fees

There is currently a 1.073% origination fee for Stafford loans and the origination fee for a Federal PLUS loan is 4.29%. In comparison, most private loans don’t charge any fees these days. So if you were to amortize 4% in fees over a 10-year period, it will come out about the same as if you were to pay a 1% higher interest rate.

Things to keep in mind about federal loans and their repayment options

If you get a federal loan, you may be able to postpone repayment for three years or longer through what’s called deferment or forbearance – assuming you have a financial hardship such as medical expenses or unemployment. If you are unable to pay your monthly bills in full because of low income, you could apply for Income-based repayment or Pay As You Earn repayment. Income-based repayment would cap your monthly payments at 15% of your discretionary income while Pay As You Earn would cap them at 10% of your discretionary income. For that matter, if were unemployed, your monthly payment would be zero because 10% of nothing is nothing.

Refinancing federal loans

A few banks and non-banks are now offering to refinance any combination of private and federal loans. But if you were to consolidate your federal and private loans into one of these new loans you would give up all the benefits offered by federal loans such as debt forgiveness for public service jobs and income-based repayment programs. The upside is that you might be able to get a better interest rate by consolidating federal student loans through a private lender than with a Federal Direct Consolidation Loan.

Consumer running while carrying a briefcaseWhich makes the most sense if you’re a parent?

It doesn’t make much difference whether you cosign on a private loan for your child or get a parent’s PLUS Loan, you’ll still be required to take over the loan or loans if your child can’t or doesn’t make the payments. So that means as a parent you would be on the hook either way. On the other hand if your child takes out federal student loans only he or she will be responsible for repaying them and you as the parent will be off the hook. So no matter how tempted you might be to cosign on a loan or take out a Parent PLUS loan, it’s really better for you financially to let your child get the loans. This can be especially true if you’re nearing retirement. Students today are graduating with an average of nearly $30,000 in student loan debts and that’s probably a burden you might not want to assume as you near those golden years. You could always choose to help your child repay his or her federal loans when and if it makes sense to you financially. But you would not be committed to repaying that $30,000 or whatever.

Why You Should Be Paying The Interest On Your Unsubsidized Student Loans

student loan debtDo you have subsidized or unsubsidized student loans? It’s important to know which type you have and the difference between them. If you don’t know whether you have subsidized or unsubsidized loans it’s easy to find out. All you need to do is go to the National Student Loan Data System website as this is where you will find all the information regarding your federal student loans including their type, when the funds were disbursed and how much you owe on each – if you have more than one loan.

The one very big difference

The big difference between subsidized and unsubsidized federal student loans is that the government pays the interest on your subsidized loans while you’re in school. These loans are generally needs based. If you don’t qualify for needs-based loans, you will have an unsubsidized loan, which means you will be required to pay the interest on them while you’re in school. To make matters even worse, if you don’t pay the interest on unsubsidized loans it will continue to accrue and will be capitalized or added to your balance owed. You will then end up paying interest on interest and of course your balance or the amount you owe will grow.

Your best option

What all this boils down to is that if you have unsubsidized loans you should try to pay the interest on them instead of letting it accrue. The good news is that the interest on these loans is usually fairly low. For example, it could as little as $50 a month though you’d be better off paying as much as you can. We know that if you’re carrying a full 15 credit hours a semester it can be tough to take on a part-time job but you just might have to reprioritize and let your social life slide a bit as you probably don’t have much cash just sitting around. Downgrading your social life may not sound like much fun – to pardon the expression – but it’s a lot better to graduate owing as little as possible versus the average student loan debt of last year’s graduates. It was either $26,000 or $30,000 depending on which source of this information you choose to believe. That’s a lot of money these graduates will have to repay and this could have a negative effect on their lives for years to come.

About the same as a new pair of shoes

When you stop to think about it paying off your student loan interest at the rate of $50 a month is about the same as buying a new pair of shoes. You should be able to easily do this by getting a job either on- or off-campus. While these jobs typically pay minimum wage or a bit more it still wouldn’t take many hours a week or month to accumulate that $50. Where we live the minimum wage is currently $8 an hour. At this rate you might need to work less than seven hours a month to pay the interest on your unsubsidized student loans. Of course, if you were to work more hours you would have more money available to pay on those loans. Plus, working a part-time job would allow you to earn some extra cash for living expenses and also builds your resume, which could help when it comes to getting a job after you graduate.

restaurant-3_lShould you work on or off-campus?

Just as there are only two types of student loans there are only two types of jobs – on-campus and off-campus. There are pros and cons to both of these. One of the most popular of the on-campus jobs is those available through the Federal Work-Study Program. Unfortunately, this is also a needs-based program, as you would have to demonstrate a financial need, be enrolled in a degree program and maintain satisfactory academic process. The downside of an on-campus job like this is that with some schools the money you earn automatically goes towards your tuition fees. In others you’ll receive a paycheck just as if you worked off-campus. You could then use the money to pay the interest on your loans and to help with your living expenses.

The advantages of an on-campus job

One of the biggest advantages of an on-campus job is that if you go to a relatively small school you should be able to just walk from class to your job. In addition, it’s usually fairly easy to get an on-campus job. This can make it a lot easier to work 15 or even 20 hours per week. Plus, you might be able to get a job where you would work a couple of hours per day between classes instead of a four or eight hour shift at an off-campus job.

The pros and cons of an off-campus job

If you go to school in an urban area there is practically an unlimited number of possibilities for a job. You could work in a restaurant or clothing store or for a doctor or lawyer as an office assistant. For that matter, you could even create your own job by mowing lawns, babysitting or running errands. With all of these different options available, it’s likely you would be able to earn more than with an on-campus job. And you can use the money anyway you please instead of it automatically going to pay for part of your tuition.

An off-campus job can also be very good work experience. These jobs give you better exposure to the “real world” than working in your school’s library or some other on-campus job. If you were able to get a job working retail or as an office assistant this would look very good on your resume. You could also look for jobs that would be more related to your career when you graduate.

The biggest downside of an off-campus job is that transportation could be a problem. You would need to have a reliable ride, good public transportation or a car to get to that job. The cost of getting to and from your job could quickly reduce the amount of money you would get by working off-campus. In addition, you would probably be required to work a full four or eight-hour shift and you could find it hard to successfully juggle your classes and those shifts.

So which would be better?

The answer to this question is some “depends.” It will depend on whether or not you feel the convenience of working on-campus outweighs the additional income you would earn working off-campus. It may also depend on whether you would be able to get that perfect off-campus job that would be a boost to your career and would make sacrificing your social life worthwhile. Of course, there’s nothing that says you couldn’t do both at the same time or both off and on. The important thing is to weigh your options and make sure that whatever choice you make will help you earn your degree and ultimately start a career.

6 Key Facts You Need To Know About Online Education

Girl with one hand on laptop, the other giving a thumbs upIf you watch television for more than 30 minutes a day you’ve undoubtedly seen at least one ad for online education. One of our state universities seems to run them almost continually. These commercials make it seem as if an online education would be a great option for many people. If you’re a working person then getting your degree online would mean you could take classes when they would best fit your schedule. Stay-at-home moms with small children could also benefit from the flexibility offered by an online education. It’s also very tempting to think that you could get a bachelors degree while sitting in front of a computer in the comfort of your own home versus having to get in your car and drive to classes several times a week.

But there are some key things you should know before you sign up for online education and here are six of them.

Key fact #1: It may not be as cheap as you think

While you might think that getting your degree online will be cheaper than going to a traditional brick-and-mortar school, this may not necessarily be the case. Some sources have found that getting a degree online can actually be more costly than getting a degree from a traditional college. U. S. News recently did an analysis of about 300 programs and found that it’s more costly on a per-credit basis to take an undergraduate course online than a comparable course on-campus. In fact, this analysis revealed that one credit towards a bachelor’s degree on an online basis cost $277 compared with $243 per credit when attending a traditional brick-and-mortar college. There was also a study done by the American Association of State Colleges and Universities that found similar results. Four hundred public universities were involved in this study and it concluded that more than 60% charged the same tuition for courses that were taught face-to face as for courses taught online. However, 36% of the schools charge more for online tuition.

The reason for this is that if a school doesn’t already have an online program then creating one requires a significant investment. Online courses generally cost more to develop and require more time to teach effectively. Many members of a school’s faculty are used to teaching face-to-face and require a good deal of support and training to teach well online.

Key fact #2: You may not get the same quality of instruction

Schools that are using their own faculty for online courses generally find it’s difficult to make it less expensive without cutting corners. Faculty members that are full time are expensive. As a result, some schools hire instructors for their online programs that don’t receive benefits and who may not have advanced degrees. This becomes something of a crapshoot as you could have a very excellent instructor in one course and a very mediocre one in another. Colleges have to watch their costs these days and it can be very tempting to have their online courses taught by what are called “adjunct professors,” which is a fancy term for people that are recruited to teach specific courses and that come from the world of business – and are not faculty members at all.

Key fact #3: There may be hidden costs

When you take online courses in the comfort of your own home you definitely eliminate one cost – room and board. However, there can be some unpleasant surprises when pursuing an online degree. For one thing, you could end up paying more if you earn your degree by taking a class here and a class there. This is sometimes called tiered tuition. As an example of this, one online university has a lower per-credit tuition rate if you’re taking seven or more credit hours a term. This also accomplishes two things. It saves money and it can help you get your degree quicker.

It’s also possible that your school has separate tuition rates for in-state and out-of-state students even for their online programs. This is something you should carefully research before signing on the dotted line. The difference can be pretty steep, too. One of the schools with higher tuition rates for online students that reside out-of-state is Daytona State. It charges just $92 per credit for in-state students as compared with $560 per credit for students that live out-of-state.

There can also be many fees. As an example of this almost all online degree programs charge a technology fee but the amount of this varies widely between schools. Students taking courses online at one university are charged a $40 technology fee for each of their sessions while at another school the technology fee runs $120 per course. You should also keep your eyes open for graduation fees, assessment fees and yes, even parking fees.

Key fact #4: Not every online program is 100% online

Another thing to be careful of is that not all online programs are entirely online. There are programs, especially at the graduate school level, that require you to also do an in-person residency. For example, one South Carolina student that was working towards a master’s degree online at Gonzaga University was surprised to learn he would be required to do a three-day residency on campus. Since Gonzaga University is located in Spokane he was forced to take three flights to get there plus there were hotel and other expenses. This meant that his three-day campus residency ended up costing him at least $1000.

money and graduation cap in chainsKey Fact #5: Make sure you know how you will pay for your online degree

Before you choose an online degree program it’s important to consider how you will pay for it. While an online degree might cost less than going to a brick-and-mortar school, it will still be an expensive purchase and you should shop around to see where you would get the best value for your money. One of the best things about online learning is that there is no restriction as to the choices available. You could live in the far northwest and take online courses from a school located in Florida and vice versa.

It’s especially important to make sure the quality of your program is high if you’ll need federal student loans or private loans to pay for your online schooling. For one thing, you’ll need to make sure that a recognized national or regional accreditor has accredited your program. This is one way to make sure that it meets at least minimum standards. This also increases the odds that any credits you earn will be transferable if you change your mind and decide to attend a different school midway through your degree program. There are schools that are actually beginning to refuse to accept transfer credits from online programs regardless of accreditation. This is because they believe some online programs have very low standards.

Key fact #6: Borrow as little as you can

Whether you use federal funds or private loans to pay for your online degree it’s critical to borrow as little as possible. Student loans will stay with you until you repay them. The standard repayment plan for Direct Federal Student Loans is 10 years at a fixed interest rate. As of this writing it is 3.86% for both Direct Subsidized and Unsubsidized loans. What this translates into is if you were to borrow a total of $20,000 to pay for your online degree your monthly payment would be approximately $193. Fortunately there are ways to drive this down through what’s called Income-driven Repayment. You can learn more about these options by clicking on this link. The fact is that getting federal student loans can actually be too easy. So if you think an online education is for you, be sure to pick a program that will deliver the maximum amount of value at the least possible cost so you can keep your borrowing to the very minimum.

Restarting Your Education? Check Out These Four Important Tips

This year resolutions conceptHave you made your New Year’s resolutions for 2015? Is one of them restarting your education? The problem with New Year’s resolutions is that it’s easy to get a full head of steam going at first but much more difficult to complete them as the months go by. If one of your resolutions is restarting your education to complete your degree it’s important to understand that any student loans you had before haven’t gone away. They’re like that Roach Motel where roaches checked in but they never checked out. Once you have student loans, there’s no getting away from them. They will stay with you until you repay them or if you could get them canceled (more about this later).

Given the fact that your goal is to return to school this year it’s important that you do it the smartest financial way you can. As a nontraditional student there are three things to understand that would help you do this.

1. Get any existing loans in order

If you borrowed money when you were in school before it’s important to know the status of your loans. The website National Student Loan Database System has all the information on any federal student loans you had including the type of loan, when the money was disbursed, the last payments you made and your balances. When you check out your status in this database you may find you have some problems. If so, you will need to get these taken care of before you can get any additional federal aid. This is especially important if you find you have a student loan in default. Unfortunately, it’s very easy to default on a student loan because all you have to do is be one day late on a payment.

If you do find you are in default on a federal student loan you will be ineligible for any more federal student aid. You will also lose the benefits that come with federal student loans including Extended Repayment, Graduated Repayment and Income-based Repayment. Plus, a loan default is one of the worst things to have in your credit reports.

What to do if you have a loan in default

There are three different ways you can get a student loan out of default. They are loan consolidation, loan rehabilitation and, of course, loan repayment. If you were to choose to rehabilitate your Direct Loan or FFEL Program loan, the Department of Education and you must agree on an affordable and reasonable payment plan. (Note: if you have a Perkins Loan you will need to contact your school.) Your loan will have been rehabilitated when you have voluntarily made the payments you agreed to and on time and a lender has agreed to buy your loan. If you are able to and is and is one of the back-to-school problem with New Year’s resolutions is that it’s easy to get going for a do this before the last day of classes of your school year you may be able to retroactively get aid for the entire year. Of course, if you need to rehabilitate a loan this may mean you’ll have to delay the start of your schooling.

2. Understand the differences between federal and private student loans

As eager as you might be to restart your education you need to be careful the type of loan you sign up for. There are really only two types. They are private loans and federal loans. Private loans are just that. They come from private lenders such as a credit union or bank. Two of the biggest private lenders are Wells Fargo and Discover. However, as a general rule these loans do not come with the same repayment benefits as federal loans. They generally have a fixed interest rate and a fixed term. In comparison, federal student loans offer a number of different repayment options as well as postponements, cancellation and loan forgiveness. If for some reason you can’t get enough federal aid to cover your schooling you may have to get a private loan. However, it’s best to exhaust your options for federal student loans first and then shop around for the best deal you can find in a private loan.

3. Be smart about which program you choosestudent loan debt

You’ve probably seen dozens of advertisements for different kinds of degree programs. The important thing is to do the research so you will know what to expect before you sign up for any one of them. Your goal should be to borrow sensibly for the educational program that will be best for you. For example, since you’re returning to school you might decide to take a different route to your degree such as attending a community college first to complete your lower-level course requirements. While this can be an excellent option just make sure that your credits will transfer.

There are also a huge variety of online programs and for-profit colleges available but again be sure to do your research before you sign up for any of these. You should be especially careful in the case of for-profit schools. As an example of why this is true, the federal government recently forced Corinthian College to shut down 97 of its US campuses by withholding access to any more federal money. The school was in trouble financially plus the government thought its ads and claims were misleading. The Department of Education has also targeted schools such as ITT Technical College and the Art Institutes chain.

4. Know it’s possible to get federal loans cancelled

As noted above another benefit of a federal student loan is that it’s possible you could get it canceled. In fact all of your federal loans will be canceled if you become totally and permanently disabled. You may also be eligible to have your loans canceled or discharged if the school falsely certified that you would be eligible to receive the loan based on your ability to benefit from its training or if it signed your name on a promissory note or application without your authorization. You could also have your federal loan canceled if the school certified your eligibility but due to a mental or physical condition, age, criminal record or other reason you would be disqualified from employment in the occupation in which you were being trained. And you might be able to get your Direct Loans or FFEL Program loans canceled if you withdrew from a school but it didn’t pay a refund that it owed to the lender or to the US Department of Education.

What You Need To Know About Student Loan Deferment And Forbearance

young man holding empty wallet and booksAre you struggling with student loan payments you can’t afford? You are not alone. A lot of borrowers are feeling the same way.

This type of debt has become one of the most dangerous credit obligations. The main reason is the aggressive collection methods for those who default on their loans. One of the biggest mistakes that you can ever make on this credit obligation is not to make payments.

According to an article published on, the consequences of defaulting on your college debt are as follows:

  • Ruined credit history.
  • Increase in loan balance since interest will continue to accrue and collection fees will all be capitalized on your balance.
  • Legal suits filed against you.
  • Wage garnishment, and threatened Social Security benefits and tax refunds (at least for federal student loans).

There are probably more negative consequences apart from these and this is why defaulting on this type of debt is highly discouraged.

Fortunately, there are options for you to avoid defaulting on your student loan debt. Of course, you will have to qualify for them as you cannot just tell them that you are having a hard time paying off what you owe from school. You need to prove to them that you are in a financially difficult situation.

What happens to your college debt when in deferment or forbearance?

Even if your finances cannot afford to continue making payments towards your student loan, your lenders do not really care about that. All they really care about is how you will repay your student loans. No ifs and no buts. If you choose to ignore it, you will only be making things worse. This is why you have to talk to your loan servicer or private lender about your options. And two of the options that they will offer you is either deferment or forbearance.

Of all the choices that you have to stop making payments (or at least reducing them) without defaulting on your loans, these two are most encouraged options. Let us define them both.


Deferment is a time when you are officially allowed to stop sending payments towards your student loans. When we say official, it means you will not be charged with late penalty fees and your account will not be deemed as a defaulted loan. Of course, this is only temporary. It will end at some point (sometimes up to 3 years) and once that period ends, you are expected to pay your loan as usual.

It is important to note that most student loans will continue to accrue interest while in deferment. If you have subsidized federal loans, this means the government will pay for your interest while you are in deferment. In this situation, deferment will really benefit you. However, if you do not have a subsidized loan, the benefits will not be as extensive. The interest that you will not pay during this period will be capitalized and added to your outstanding balance. That means, after your deferment is done, you will find that your loan balance has grown. The longer you stay in deferment, the bigger your debt becomes.


Forbearance, on the other hand, is your option when you do not qualify for deferment. This is when you are allowed to stop or lower your monthly payments without being charged with late penalty fees. This can go as long as 12 months. The difference with a deferment scenario is your interest will always accrue – regardless if you have a subsidized or unsubsidized loan.

Obviously, the better option here is deferment but that would depend on the type of student loan that you have, your financial situation and your reason for deferring on your loans.

According to an article published on, a lot of borrowers are in deferment or forbearance as of the first half of 2014. Specifically, 18% are in deferment while 15% are in forbearance. It is hard to determine the main reason for borrowers to opt for these two temporary student loan relief. The records kept by the government is not really complete or organized enough to provide this data.

Scenarios that allow you to postpone or reduce your student debt payments

As mentioned, not everyone can be approved for deferment or forbearance. Here are the specific requirements as provided by

You can apply for deferment, at least this is true for federal student loan borrowers, if you are in the following situations.

  • You are enrolled at least half-time in a qualified college or career school.
  • You are still studying in relation to your graduate studies or in a rehabilitation training program for disabled individuals.
  • You are unemployed or unable to find work (can avail of up to 3 years of deferment).
  • You are currently experiencing economic hardship (can avail of up to 3 years of deferment).
  • You are currently serving an active duty in the military during a war, military operation or national emergency.
  • You are a member of the National Guard/Armed Forces Reserve or you were called to duty while enrolled at least half-time (current or within 6 months of enrollment) – as long as the period is within 13 months following the end of your active duty or return to enrollment.
  • You are within a period of service that qualifies for a Perkins Loan discharge or cancellation – applicable to Perkins Loans only.

All of these (except for the last one) are applicable to Direct, FFEL and Perkins Loans.

When it comes to forbearance, there are two types that you can avail and the qualifications will depend on them.

  • Discretionary Forbearance. This is when the lender decides if you will be allowed forbearance. Usually, you will be approved if you can prove financial hardship or illness that leaves you unable to work and earn money.
  • Mandatory Forbearance. This is when your specific situation requires the lender to grant you forbearance. These situations include internship or residency (medical or dental), you received a national service award after serving a national service position, your teaching profession qualifies you for a teacher loan forgiveness, you qualified under the US Department of Defense Student Loan Repayment Program, or you are a member of the National Guard. It is also possible to get forbearance approval if your student loan monthly payments amount to 20% or more of your monthly gross income.

Tips when postponing or reducing payments on your college loans

Even when you qualify for deferment or forbearance, you need to know a couple of tips first before you can really demolish your student loan debt. Here are a couple of tips that you can follow.

  • Check if you can at least pay the interest of your loan. Deferment is really beneficial for those who have subsidized student loans. That means the government takes over the interest payments. If your loan is unsubsidized, that means your interest is accruing while in deferment. In forbearance, your interest accrues even if you have subsidized or unsubsidized loans. As mentioned, this means you will have a bigger balance at the end of the deferment or forbearance period. If you can pay the interest, you can keep it from accruing or capitalizing on your principal balance.
  • Live a frugal life to strengthen your finances. Being approved of deferment or forbearance on your student loans mean you are in a financial hardship. To help maximize the benefit of these two, you need to adapt a frugal lifestyle to lower your expenses significantly. That way, you can increase your extra money thanks to either the deferment or forbearance and your lower expenses.
  • Research on repayment plans that you can use after. As mentioned, this is a temporary arrangement on your student loan accounts. It will end. And when it ends, it will not be towards forgiveness. That means you still need to pay off what you owe. Make sure that while you are in deferment or forbearance, you take this chance to research on the repayment options that you can use. If that means going into a public service career, then you need to be aware of what you need to do to qualify for these.

6 Important Student Loan Resolutions For 2015

National Debt Relief now offers Student Loans ConsolidationThere‘s a brand new year upon us and with it comes the need to make some New Year’s resolutions. By this we don’t mean the standard lose weight, give up smoking or get a new job. What we mean is that if you’re a college student or will be entering college next year there are some resolutions you need to make for 2015 that are specific to your situation. If you choose to make these resolutions you can graduate from college either debt-free or owing very little in student loans. This is important because student loan debts can be a drag on your life for the next 10 years if not longer. Recent college graduates owe an average of anywhere from $16,500 to $30,000 depending on which source you want to believe.

Even if you were to graduate owing just the $16,500 that’s a lot of debt to have to pay back when you’re just starting work. For that matter, you may not even be able to get a job as the Economic Policy Institute recently reported that about 8.5% of college graduates between the ages of 21 and 24 were unemployed. Or you could end up part of the roughly 44% of recent graduates that had a BA degree or higher but were in a job that technically did not demand a bachelor’s degree and were, thus, “underemployed.”

Resolution #1: I resolve to check out all possible alternatives

Go back and read the previous paragraph. Suppose you were unable to get a job or became underemployed. While this might be bad news it would be even worse news if you owed $16,000 or more in student loans.
Before you sign up for any student loans check out the options. Assuming that you didn’t get a big fat scholarship from your school you should go to a website such as The College Board where you could search for information on thousands of different college scholarships, grants and internships. There is also CollegeNET, which is a searchable database of more than 600,000 awards. Does your mom or dad belong to a fraternal or social organization such as the Elks, Moose or Rotary International? These organizations often have scholarships available to the children of their members. The company that your mother or father works for may have scholarships available to the children of their employees. All these alternatives are certainly ones you need to check out before you start borrowing money.

Resolution #2: I resolve to get a part time job

Almost every college student will qualify for some sort of financial assistance. For example, if you are unable to get a full ride scholarship you might be offered a part scholarship or a grant of some kind. Beyond this, you need to think seriously about getting a job to supplement whatever financial assistance you’ve been given. There’s hardly a college town that doesn’t have part-time jobs available from waitressing to sales clerking in mall stores. These jobs generally don’t pay a lot per hour but if you were to work 20 hours a week at eight dollars an hour you’d be earning better than $600 a month pretax. This could go a long way towards paying your tuition and maybe even put a dent in the cost of your room and board.

Resolution #3: I resolve to live at home – for at least two years

While most high school graduates can’t wait to go away to college it’s better to stay at home at least for your first two years. When you live at home you basically eliminate all room and board charges, which can cost from $7500 to $9000 per year depending on whether you attend a public or private university. Many of today’s smart students are living at home and attending a two-year college before going away to school. Your first two years at college will consist mostly of taking “basic” courses that are generally the same whether you attend a two- or four-year school. If you were to do this you would save around $15,000, which might be $15,000 less in student debt. If you’re lucky enough to live in a town with a good four-year college or university then living at home for those four years could save you as much as $30,000.

Resolution #4: I resolve to understand student loans

One of the biggest downsides of student loans is that for most people they are just too darn easy to get. All you generally need to do is walk into your school’s financial aid office, sign a paper called a note and presto! You have money available to pay for your next semester. If you will be required to take out a student loan or loans you need to know the different types. All federal student loans are now called direct loans because they come directly from the Department of Education (ED). These loans come in two types. They are either subsidized or unsubsidized. Subsidized loans are where the federal government covers the interest on them while you’re in school at least half time or are in a period of deferment. These loans are based on financial need, which is determined by your college or university. In comparison, unsubsidized student loans are not needs based but require that you do pay the interest on your loan or loans during all periods that you be in school.

Resolution #5: I resolve to not ask my parents to get Parent PLUS Loans

These loans are unsubsidized and available to the parents of dependent students as well as graduate/professional students. They are to help pay for educational expenses up to what it costs to attend the school minus any other financial assistance. Since they are unsubsidized, your parents would be required to pay the interest on them during all periods that you are in school. There are several reasons why you should not ask your parents to take out one of these loans. First, the interest rate is currently 7.21% for loans disbursed after July 1, 2014. In comparison your parents might be able to get a home equity line of credit with an interest rate as low as 2.99%. But second and more importantly do you really want to stick your parents with a pile of debt that could take them 10 or 20 years to pay off? Assuming that your parents are in their early 40s, a Parent PLUS loan could keep them tied up in debt until they were ready to retire.

Resolution #6: I resolve to graduate in four years

Did you know that according to a recent study only 19% of students graduate in four years? This might explain why so many of them graduated owing $16,000 or more. If you were to take an extra year to graduate this would increase your cost or debts by at least 20%. You could avoid this by buckling down, taking a full 15 credit hours or more a semester and graduating in four years. For that matter, if you’re really smart and a hard worker you might be able to graduate in just three years, which would reduce your costs dramatically. And if you don’t think that going to college for a fifth year will have serious consequences, watch this short video on the true cost of not graduating in four years …

Older Americans And Student Debts — A Bad Combination

Elderly coupleAre you one of the estimated two million Americans age 60 or older that still owe on their student loans? It can be tough to be saddled with student debts when you’re in your 30s or 40s but it can be lots worse if you’re in your 60s. You could even find that those old student debts are jeopardizing your Social Security benefits. This is because Uncle Sam can be a very unforgiving relative as our government has the right to seize portions of the Social Security checks of those that failed to repay their federal student loans. In fact, over the past year the government has withheld the Social Security benefits from 140,000 borrowers that were delinquent on their student loans. To make matters worse the federal government relies more and more on private collection agencies to go after delinquent borrowers and these agencies can make a person’s life nothing short of a living hell.

 You could be shocked

If you’re 60 or older and one of those two million Americans that still owe on their student loans you could be shocked when your Social Security check arrives and you find it’s been slashed by $100 or more. If you’re typical you depend a lot on that check to either support you or to supplement your savings. A $100 hit might not seem like much to some people but for those living on Social Security it could mean buying fewer groceries or having to cut back on some other necessity of life.

 If you’re not in default

If you are in default on a student loan meaning that you just quit paying on it some years ago that’s one thing. If your loans are in good standing but you’re struggling to meet your payments you could opt for Income-driven repayment. There are actually three Income-driven repayment programs available one of which would set your payment at no more than 15% of your discretionary income. In case you’re wondering about your discretionary income Uncle Sam defines it as the difference between your adjusted gross income and 150% of the federal poverty line, which corresponds to your family size and the state where you live.

There is an even better Income-driven repayment program called Pay As You Earn that would cap your monthly payments at just 10% of your discretionary income. However, this program is available only to those that took out loans very recently. And if you have older Federal Family Education Loans you would not be eligible for this program. However, you could use a similar one called Income-sensitive repayment. This is where you choose a monthly payment amount between 4% and 25% of your monthly income. Unfortunately, you can only use this plan for five years. But you could consolidate your existing Federal Family Education Loans into a new Federal Direct Consolidation Loan and this would then make you eligible to take advantage of the Income-based repayment plans.

 Did you take out Parent PLUS loans to help your child?

If you did take out Parent PLUS loans things get a little stickier. These loans are technically not eligible for Income-based repayment but if you were to consolidate them into a Direct Consolidation Loan, they would then become eligible for the Income-contingent Repayment program. While this program also bases your payments on your income and family size your payments would generally be higher than those under Income-based Repayment.

 If you are in default

If you just stopped paying on a federal student loan some years ago you are in default. This means you could see up to 15% of your social security benefits garnished. Sadly enough, according to the GAO (Government Accountability Office) more than 150,000 people receiving Social Security benefits saw their Social Security garnished in 2013 as a result of their student loan debts. And of this group 36,000 were over the age of 65.

The good news

If your Social Security benefits are being garnished you could take advantage of some of the options outlined above to reduce the amount being taken out of your check. Under certain circumstances, your payment could be as few as zero dollars. But you will first have to get your loan or loans out of default – either through consolidation or rehabilitation. If you want to do this you will need to contact your lender or loan servicer to discuss your options. Consolidation is fairly self-explanatory but rehabilitation is a bit trickier. To get a loan or loans rehabilitated you and the US Department of Education would have to agree on an affordable and reasonable payment plan. You would then be required to voluntarily make those payments on time and a lender has purchased your loan. At that point your loan will have been rehabilitated and you would again be eligible for benefits such as the Income-driven Repayment programs.

Private student loans

Stamp Shows Consolidated Loan approvedIf you cosigned on a private student loan for one of your children then, as you may have learned, you’re on the hook for repaying it. Since private student loans don’t offer the same repayment options as federal student loans you should consider either refinancing or consolidating it. Both Wells Fargo and Discover recently announced that they’d be offering modifications on private student loans for borrowers that are having a tough time financially. You could also contact your lender and see about postponing your payments although your interest will continue to accrue and you may be charged a fee for this.

The worst-case scenario

Failing everything else there is always the “nuclear option” of filing for bankruptcy. Although it is very difficult to get student loans discharged through bankruptcy it is not impossible. There’s what’s called the Bruner test. It’s a three-part test the bankruptcy judge would use to determine whether or not to discharge your student loans. The first part of this is that you must be able to show that you cannot maintain a minimal standard of living based on your current income and expenses if you are forced to repay your loan(s). Second, you must be able to demonstrate that this situation is likely to persist for a large portion of your repayment period. And third, you must be able to show that you have made what’s called a good-faith effort to repay your loans.

 It may not be easy

Repaying student loans may not be easy at any age but it can be particularly difficult if you’re an older American. However, if you learn about the alternatives and options available to you this can go a long way towards earning you some peace of mind as you head into 2015.

How To Pay Off Your Student Loans Without Having To Live On Mac & Cheese

money and graduation cap in chainsWe understand that you really do want to pay back those student loans. The problem is you never seem to have enough money to make those loan payments and yet have a decent lifestyle. You worked hard to get through college but you’ve learned one of the sad facts of life, which is that a starting salary is just that – the lowest salary you will probably ever earn. So what can you do in the meantime about those stupid, err, student loans?

#1. Understand your options

Whether you realize this or not when you graduated you was automatically put on what’s called 10-Year Standard Repayment. This is where you have a fixed interest rate and a fixed monthly payment for 10 years. If you are struggling to meet those fixed monthly payments the good news is that you have options. One of the best of these is called Graduated Repayment. This is where your payments start low and then gradually increase every two years. This repayment plan could be an excellent option if you believe that your income will also increase over the next 10 years. A second option, Extended Repayment, is just what the name suggests. It’s a way to extend the term of your loans to as long as 30 years. This would probably result in the lowest possible monthly payments but then do you still want to be paying on your student loans when you’re in your 50s? Finally, there are three Income-driven programs. If you were eligible for one of these, Pay As You Earn, your monthly payments would be capped at 10% of your discretionary income.

Here, courtesy of National Debt Relief, is a brief video that explains more about the repayment options available to those that have federal student loans …


#2. Remain organized

If you’re not careful the task of managing your student loans can become like trying to herd cats. You need to stay organized which means keeping track of your loan information. If you’re not sure of how much you owe and on which loans you should go to the National Student Loan Data System for Students ( Here is where you will find all the information regarding your federal student loans including the types of loans, when the funds were disbursed, how much you owe on each of your loans and your interest rates. This is the fundamental information you need in order to manage your student loans and make sure you keep current.

#3. Have a plan

Many experts say that when you’re first out of school you should try to limit your required payments as much as possible. This is because it’s equally important to have an emergency savings fund in the event the transmission falls out of your car or you have a medical emergency. You should definitely try to sock away enough money to cover at least three months of expenses. After you’ve done this, you could then consider increasing your loan payments though you will want to ensure that this doesn’t mean incurring penalties and that any extra payments you make will go towards your principal loan balance. You might also consider consolidating or refinancing your student loans and what it is you would need to do to qualify. As noted above, there are a number of different repayment programs for federal loans. You could make your payments more affordable with just a little planning. As an example of this when you’re collecting information to prove your income level be sure to provide the most accurate information as your situation may have changed radically since you filed your taxes.

#4. Automate your payments

We understand that repaying your student loans can seem less important than buying food or paying rent but it is critical that you stay current. Federal student loans are considered to be in default the day after you miss a payment. However, you won’t be in serious trouble until you haven’t made a payment for 270 days because this is when your loan may be turned over to a federal debt collector. Trust us when we say you don’t want this to happen. Once your loan goes to a debt collector you could see a portion of your wages garnished as well as a portion of your income tax refunds. You would lose your eligibility for any additional student loans and all those nice options such as Graduated Repayment would go away. A better solution than trying to remember to write a check every month is to automate your payments. This is where your loan servicer automatically deducts the money from your bank account every month. Of course, for this to work the money has to be there. Assuming that it is, you will then never miss a payment and won’t ever have to worry about going into default. If you check with your loan servicer you might even find that it offers discounts and incentives for you to enroll in automatic payments.

#5. Check out all available options

The good news is that there may be options available to you that you’re not even aware of that would help you pay down your loans. For example, there are employers that offer assistance with student loans as part of their benefits programs. Other companies might be willing to provide you with some help if you ask. Believe it or not you could also volunteer your way to a debt-free life. Plus, you could deduct up to $2500 of your student loan interest from your income tax if you fall within a certain income range. It might be tempting to use your tax refunds to pay for a trip to Mexico or the Caribbean but it would be far better to use them to pay down your student loan debts.

Broke woman student holding books and empty wallet#6. Understand what’s happening with private student loans

If you had to get private student loans to finance your education you were pretty much stuck until very recently. Private lenders such as Wells Fargo and Discover offered zero options. You had a fixed monthly payment, a fixed interest rate and a fixed term and that was it. However, as Bob Dylan has sung, “the times they are a changin.” For example, Wells Fargo is lowering its interest rates to as little as 1% in a program that is now available to all eligible borrowers that are up to or around 120 days and 130 days behind in their payments. This new program is also available to those who had been on time with her payments but are in risk of falling behind because of unemployment, pay cuts or medical issues. If you have defaulted on your loan or are 130 days or more late with your payments, you would not be eligible for this program.

Discover has started allowing some borrowers to make interest-only payments for temporary periods of time. It has said that it will roll out permanent modification options early next year, which could include interest-rate reductions and even partial loan forgiveness. Right now, the interest-only option is only available to those that are less than 60 days late on their payments and were not previously in a similar repayment option.

Don’t wait. Act now

If you’re struggling to repay a private loan or loans don’t wait for these companies to come to you. Contact Wells Fargo or Discover immediately – especially if you are possibly headed for default.

Coping With The Living Nightmare Of Student Loan Debt

zombieIf you graduated owing $10,000 or less in student loan debts, congratulations. This makes you the member of a very small club. Students this year graduated owing an average of $29,400 each and remember this is just the average and doesn’t include those who went on to get a Masters degree, a PhD or to become a lawyer or a doctor. One recent study found that about 40% of outstanding student loans were used to finance graduate and professional degrees rather than just bachelors or associate degrees. Graduate students actually owe an average of $57,600 each.

What to do if you owe $50,000, $100,000 or more?

If you find yourself facing this much debt it may seem hopeless. This can be one half of your life – assuming you’re actually able to find a job – and your earning power is still on the low side. As an example of how bad this can be if you did owe $50,000 at 6% and were in Standard 10-Year Repayment your monthly payment would be $550.10. And it doesn’t take a mathematical genius to calculate how much of a negative effect that would have on your life.

Sit down and analyze your situation

There’s an old poem where the fog “crept in on little cat feet.” Unfortunately, student loan debt can be the same way – it can just creep up on you. So if you’re looking at $50,000 or more in student debt the first thing you need to do is sit down and sort it out in terms of how much are federal loans versus how much are private. The reason to do this is because federal student debt is almost always easier to deal with. For example, you could switch out of Standard 10-Year Repayment and into one of the three Income-driven repayment programs or into Graduated Repayment where your payments would start low but then gradually increase every two years. On the other hand, private student loans tend to be very inflexible and it’s almost impossible to get them forgiven.

Contact your loan holders

If you have federal loans you should first contact your loan holders to see what repayment options would be available to you. If you don’t know your loan holders, look them up at http://// This is the national database of student loan information and it’s where you’ll be able to find everything you need to know about your federal student loans including how much you owe on each, your types of loans, when the money was disbursed and how long you will have to repay them. One of the biggest advantages of federal student loans is that regardless of which repayment program you’re on you should eventually be able to earn forgiveness. As an example of how this works if you are on Income-based Repayment and make all of your payments as required and on time then after either 20 or 25 years (depending on when you got your loan) any remaining balances would be forgiven. Of course, you could also approach any private lenders to see if you could get the terms of their loans modified due to hardship but this may not be easy. Three of the biggest private lenders – Wells Fargo, Discover and Sallie Mae – have said that they will soon offer some loan-modification programs but it is unclear as to how helpful these will be. And it’s very unlikely that will include any form of forgiveness.

Forget the bankruptcy myth

One of the biggest myths surrounding student loans is that it’s impossible to get them discharged through bankruptcy. The problem is that this belief is so widespread the vast majority of people who file for bankruptcy don’t even try to get their student loans discharged. Now, if you did borrow money to finance your education you do have a moral and legal obligation to pay back the money. But if life has thrown you a great big curveball and you can’t see any way to recover from your financial situation then bankruptcy might be your best option.

Understand the Bruner test

You could get your student debts discharged through bankruptcy if you can demonstrate you have an undue hardship. Unfortunately, the term “undue hardship” is not defined within the bankruptcy law. This means your bankruptcy court would ultimately decide what it means. In most cases it will apply the Bruner test. To pass this test you would have to demonstrate three things. First you would have to show that if you were to continue paying on the loan you would be unable to sustain a minimum standard of living. Second, you would have to show that your financial circumstances are unlikely to change in the future. And finally, you must be able to demonstrate to the court that you have made a good-faith effort to pay back your loans.

If you meet these criteria

If you believe you pass the Bruner test you will need to request that your bankruptcy attorney file what’s called an adversary proceeding. This is basically a lawsuit within the bankruptcy case itself. Technically speaking you could file an adversary proceeding yourself but due to the complex nature of these cases, it is very strongly recommended that you get a qualified bankruptcy attorney and especially one that has experience with student loan debts.

woman thinkingAnother possible strategy

In the bankruptcy code an educational loan is described as one that was used at least in part to attend an eligible education institution. It further defines an eligible education institution as one that can participate in federal student aid programs. Some people have been able to successfully argue that because their private student loans were used to attend schools that were not eligible for federal student aid programs then the loans don’t fall under the definition of an education loan and should be discharged.

Even though it is possible to get student loan debts discharged through bankruptcy consider this carefully before filing. Federal student loans have a myriad of income-related repayment and forgiveness options so you should be able to find a repayment strategy that you could manage. Plus, a bankruptcy will stay in your credit file for up to 10 years. You might be able to get new credit in as few as two or three years after your bankruptcy but it will come at a very high cost. The reason for this is because a bankruptcy will totally trash your credit score. If you were to find yourself with a credit score of 600 or less you could end up paying as much as 18% interest on a new credit card or auto loan.

While a bankruptcy will stay in your credit file for 10 years it will stay in your personal file for the rest of your life. So it could turn up to haunt you 20 years from now when you apply for a new job and your prospective employer checks your personal history. You might remember the old athletic shoe slogan “just do it. In the case of your student loan debts the best option is to “just pay them”.

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