Dealing With Debt II

When I enrolled in my Master’s program after five years as a financial planner, I considered taking advantage of an option within my loan agreement called loan deferment. The deferment option would have allowed me to postpone my monthly payments for the duration of my approved deferment. Due to my loan being an unsubsidized Stafford Loan, it would continue to accrue interest, which would be capitalized once I continued my payment plan. This option was extremely attractive, especially with the drastic decrease in our family’s income; for at least three years (i.e. the duration of my program) I would be free from the required monthly payment.

Chances are if you are considering graduate school you too have thought about the possibility of deferring your loans. You might be right out of college, or looking at a graduate degree after a lengthy stay in the work force. But before you sign the deferment papers, I would like to ask you to consider two options instead of deferment, as well as analyze the impact deferment may have on your financial situation after school. The options below are predicated on loans that accrue interest, either unsubsidized Stafford loans or private loans.

Two Viable Options:

Pay Monthly Payments: With this option, you choose not to defer making monthly payments during the duration of your graduate degree. This option is predicated upon you already being in the repayment phase of your loan program. You may also look to enter the repayment phase if you expect to spend a substantial amount of time earning your graduate degree, i.e. Master’s and then doctoral programs, which could entail over ten years of additional schooling and ten years of deferment. If you have just graduated and are looking to go to graduate school immediately thereafter, you could choose to enter the repayment phase, but choosing to repay the accruing interest could be a better option, especially if your program could be competed rather quickly, i.e. 12-24 months.

Pay Interest Only Now: With this option, you choose to defer making monthly payments or entering the repayment phase of your loan. With unsubsidized Stafford or private loans, while your payments stop, the interest continues to accrue and will be capitalized (i.e. added to the outstanding balance) upon your degree completion. As stated above, this may be a preferable option from a financial standpoint, especially if your degree program ranges from 12-24 months.

So how are you going to pay for it? As I showed last week, even if you maxed out your student loan funding for four years and decided not to pay the interest that had accrued, your monthly payment would be roughly $225; at five years, it would amount to roughly $295. The interest only option is far less expensive and may be more manageable for you financially. Either option will keep your balance from ballooning due to interest costs. While these added costs could amount to a large portion of your budget, I believe it is worth seeking two options for repayment. First, is to allocate a portion of your monthly income to debt repayment. Second, is to see if your parents would be willing to assist you by paying for all or a portion of your required need.

These two options become all the more important if you are taking out additional student loans in order to fund your graduate degree programs. Making payments now, be it interest only or a monthly payment consisting of a repayment of principal and interest will assist you in limiting the increase in your overall student loan debt.

Before I conclude I want to discuss a disturbing trend among students with high student loan debt or a lack of job prospects after graduation: continuing education as a means to defer their debt. This decision is built upon numerous problems, but those I have met who have undertaken such a drastic move normally are not able to pay for their continuing education on their own; instead, they finance it with more debt. This merely compounds the problem and increases the probability of future financial insecurity.

In the end, despite the option to defer, we decided continue the status quo, paying back EdSouth throughout my Master’s degree and well into my doctoral program. It is a decision I am extremely happy we made, especially since I am now working on year nine of my education; what I assumed to be a three year deferment would have turned into ten plus years of no payments and an accrual of interest. Thus, instead of celebrating a paid off loan in the midst of graduate school, I would have been adding to my eventual repayment schedule. Now, when I do walk across the stage to receive my diploma, it will be without a looming debt payment waiting for me on the other side.

I hope that these past two posts help you to realize the serious nature of employing loans for educational purposes. While loans may be a viable option, they are options that should only be considered after exhausting all your available resources and after committing serious time and effort to the scholarship endeavor. As a good friend of mine, who hampered himself with deferment aptly stated, “There are plenty of resources (i.e. grants and scholarships) to pay for your education while you are in school, but nothing available, except hard work, to pay for your loans afterwards.”