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| The Basics | Uncle Sam cracks the whip on students
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The recent Supreme Court decision is just another tightening of the noose.
The Supremes decided that the government could continue taking 15% of Seattle resident James Lockhart's $874 monthly Social Security check, his only income. The 67-year-old disabled man had taken out student loans in the 1980s and still owes about $77,000. The fact that it would take him about 50 more years to pay off the debt didn't dissuade the court.
The case underscores the importance of moderation when taking on student-loan debt. If you're not sure how much you can afford, check out "How much college debt is too much?"
Crucial decision ahead
If you're still in school, you'll need to make a tough decision. Consolidating now could save you money, but you'll also eat up some or all of your ability to defer your payments later.
Here's how it works. To consolidate a loan in school, you have to ask your lender to put your loans in "payment" status. Then you can consolidate and lock in the current low rate. Next, you ask your lender for a deferral so you won't have to start making payments until you graduate.
Typically, though, you can defer payments for a total of only three years. If you're a freshman or sophomore, you may not want to do that. If you have trouble finding a job after school or run into other financial setbacks, you might need that deferral.
If you're a junior or a senior, though, consolidating now might be worth the risk.
Here's what to keep in mind:
- Federal student-loan rates change July 1. You'll have until then to consolidate and lock in today's lower rates. If you consolidate in your "grace" period -- the six months after graduation -- you can qualify for the lower in-school rate. (After the new fixed rate kicks in, there won't be a difference between in-school and post-school rates.) The new rate applies only to loans issued after July 1, but rates on older loans are likely to jump above 6%, which is why consolidating now is a good idea.
- Longer payback terms mean more flexibility. Many students, eager to get rid of their debt, are choosing the shortest payback period (10 years) reduces the total amount of interest you pay. But opting for a 15-, 20- or even 30-year term gives you the choice of making a lower minimum payment if financial times are hard. You can make bigger payments if you have the extra money.
- Shop around. Many lenders will reduce your rate by a quarter point if you agree to automatic deductions from your checking account. Some will knock a full point off if you make on-time payments for three years or so.
- If you're a parent, rethink your strategy. It's usually better to have your student borrow than to saddle yourself with loans, especially if you're not saving enough for retirement or otherwise meeting your financial goals. After all, the kid's the one who's going to benefit from the education. Now that the PLUS rate is going to be higher, it makes even more sense to let your child be the debtor.
If you must borrow, you'll have to weigh whether a PLUS or a home-equity loan is the better option. Currently fixed home-equity rates are in the 7%-to-8% range for people with good credit; depending on the amount borrowed, you may be able to get a longer payback term with home-equity borrowing than with a PLUS loan. Interest payments on PLUS loans are tax-deductible up to $2,500, and you don't have to itemize; interest on home-equity loans is deductible for loan amounts up to $100,000, but you have to be able itemize to take advantage of that break.
Chung So contributed to this column.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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