It’s indisputable that consolidating all your federal student loans into one loan paid off over an extended time frame eases the monthly burden of student debt payments. However, what if the interest rates of your individual loans vary by several percentage points? Should you avoid consolidating in order to concentrate on paying off the higher rate loans first?

How Consolidated Loan Interest Rates Work

When you consolidate your federal student loans into one loan, your interest rate is an average of all your federal student loans interest rates. For example, say you you earned your Bachelor’s degree in four years and graduated in 2011 . If you borrowed conservatively ($2,500 of subsidized federal Stafford loans per school  year), your interest rates are as follows: 2010/11 at 4.5%; 2009/10 at 5.6%; 2008/09 at 6%; and 2007/08 at 6.8%.

Since you borrowed the same amount each year, each interest rate represents an equal amount of money, which is called a weighted average. Thus, you can divide the sum of all your loans by four to get your consolidated rate of 5.725%. If you had different amounts at each interest rate, your interest rate would be based on a fraction of your total new loan. For instance, if you borrowed $3,000 as a freshman at 4.5% and $2,000 as a senior, your consolidated interest rate would drop.

How Much Your Interest Rates Can Vary

If you’re a graduate student this year, you could borrow money at two different rates to cover all your school-related expenses. The 2011-12 interest rates for graduate students are 7.9% for Direct PLUS Loans, and 6.8% for subsidized and unsubsidized loans.

Which Loans You Should Leave out of Consolidation

All the loans you choose to consolidate are inseparable. According to a Department of Education representative, you can’t pay off your higher interest rate loans first within your new consolidated loan, but you can leave out a loans and pay them off separately. The catch is, that the loans left out of the consolidation will still be under a 10-year repayment policy.

Example:

Say you have $55,000 in student loan debt with a potential consolidated rate of 5.75%, resulting in a payment of $346 for 25 years. Your total interest paid over time would be nearly $49,000.

Then you decide to leave your $5,000 Direct PLUS loan with a 7.9% interest rate out of the consolidation. The original 25-year consolidated payment would drop from $346 to $307, and the total interest would drop from $49,000 to $42,000.

The remaining $5,000 Direct Plus loan with a 10-year lifespan would result in an additional $60 monthly payment, with interest totaling under $2,250. Leaving the Direct Plus Loan out of the consolidation will cost you an additional $16 a month in loan payments for 10 years, but will save you over $4,500 in interest.

Play with Calculators

You can play with interest rates and payment results using the student loan calculator links on the Graduation Debt articles and resources page. Call your student loan servicer for other options for reducing your payments and interest as well. While it’s likely that you will never say, “Yippee!!” about your student loan payments, you can breathe a sigh of relief as your loan balance drops at a faster rate.

Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.

Graduate students (or prospectives) beware: Beginning July 1, 2012, new federal graduate school loans will no longer be subsidized. But what does this mean for the price of your education — and how does the new regulation impact your wallet? It depends on whether you’ve graduated, are currently in graduate school, or plan on going to graduate school after 2012.

Subsidized Versus Unsubsidized Loans

Subsidized loans are interest-free while you are an in-school or otherwise have a deferment (authorized break from payments). As an example, let’s say you spent four continuous years in college, plus two years in graduate school. You have a subsidized loan from your first semester for $1,000 with a 5.3% interest rate. After completing your schooling, you would only owe the original $1,000, thanks to the subsidized nature of the loan. If your loan was unsubsidized, you’d owe your loan balance plus any interest occurred totaling $1,318.

Past Loans

Rules aren’t changing for subsidized loans you’ve borrowed in the past. If you qualify for a deferment for reasons such as going back to school to get your PhD, you will still not get charged interest for the specified time period. If you borrow federal student loan money after July 1, 2012, new loans won’t be subsidized for graduate school and beyond.

Borrowing Limits

If you’re starting or continuing a graduate degree program effective July 1, 2012 or later, borrowing limits won’t change. The total you’re allowed to borrow in the 2012-2013 school year from Federal Stafford Loans is still a maximum of $20,500 per year. The difference is all of your new loans will be unsubsidized. If you qualify for Federal PLUS Loans, you can borrow additional funds. However, these loans are unsubsidized, too.

While limits aren’t changing, always estimate your future payments by utilizing calculator links on the resources page of http://graduationdebt.org/articles/ before you decide how much of your student loan award you need. $23,000 per year for 6 years totals $138,000 (and over a $1,000 per month on a 10-year repayment plan, regardless of your interest rate).

Consolidation

If you have consolidated your federal student loans or intend to consolidate after graduation, your subsidized loans will not be affected. Even though you pay via a single check or electronic payment, your unsubsidized and subsidized loans are separated in consolidation in case of future deferments.

Income-Based Payments

If your income qualifies and you choose to utilize an income-based repayment plan, your total federal student loan debt will still be considered for calculating your payment. While both unsubsidized and subsidized loans are part of your payment, your loans are separated when if you request and receive a deferment. For instance, let’s asssume you decide to return to school after five years to complete another graduate degree or get your Phd. You’re currently on an income-based repayment plan. You have $20,000 worth of subsidized loans and $40,000 of unsubsidized loans at 6.8%. Your subsidized loans won’t acquire a dime of interest, while yoru unsubsidized loans ccumulate $2,720 each year you’re in deferment.

In conclusion, eliminating future subsidized federal graduate school lending increases the cost of your future education, but it won’t impact past loans in any way.

Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.

It’s a tough year for college students - and student loan borrowers, in general: the unemployment rate is high, subsidized graduate school loans are slated for elimination next year, and tuition is rising. But there’s potential good news, in the form of a recent executive order issued by President Obama designed to help some borrowers repay their student loans. It’s been dubbed by some as a student loan bailout.

 But how will the executive order help you – and can these changes be made without Congress?

Consolidation Changes

Before I go on, it’s time to bust a myth. The ability to consolidate private loans and federal loans together is relatively nonexistent. In actuality, you could always consolidate loans made by banks that were issued by the Federal Family Education Loan (FFEL) Program with loans directly made by the federal government. The difference is an interest rate reduction of up to .5% when you consolidate both types of loans —half of which is the .25% discount for choosing to make payments by direct debit that’s already available. The executive order doesn’t need Congressional approval, and you can take advantage of this offer beginning in January. 

The Caveat

There are cases where consolidating will cost you money. Let’s say you consolidated your older loans when there was a repayment benefit frenzy a few years ago, and you have new direct loans from returning to school. For instance, I received a 2% interest rate discount after 36 on time payments. If I consolidated with a new direct loan, I lose my 2% interest rate discount to take advantage of a measly .5% interest rate reduction. However, I could skip the interest rate deduction and consolidate new federal loans without my initial consolidation loan. These new loans could potentially qualify for new income-based repayment guidelines and would still qualify for the .25% direct debit deduction. Always compare options by utilizing the student loan calculator links on the resources page of graduationdebt.org.

Pay as You Earn

Income-based repayment has already existed for a few years, but with a longer pay-off time and higher payments. Prior to the new executive order, income-based repayments were capped at 15% of your discretionary income. The new plan caps payments at 10% of your discretionary income. For some, the difference is well over $100. Plus, pay-off time is shortened to a maximum of 20 years instead of 25 years; whatever balance remains unpaid after 20 years of on-time payments is forgiven by the government. Payments change each year based on your annual income. To figure out what the difference is for you, click on this link for income-based repayment calculators from the article and resources page of graduationdebt.org.

Do the Changes Require Congressional Approval?

No. However, income-based repayment changes are required to go through negotiated rule-making, a process by which stakeholders, such as borrowers and banks, meet to discuss the proposed rule changes and possibly amend them. There is no guarantee the income-based repayment changes will go through as proposed.

The Caveats

• According to a Department of Education representative, the new plan only benefits borrowers with loans exclusively dated fiscal year 2008 or later (Oct. 1, 2007 or after) who also borrow or consolidate after July 1,2012. In other words, don’t consolidate your loans until July 1, 2012 if you might qualify for reduced income-based repayment. Loans made after July 1, 2012 could also qualify.
•  Until negotiated rule making takes place, nothing is concrete. It’s possible older loans could qualify as well, but more than likely only if you also have newer loans.

Stay Tuned

Unless all your loans are pre-2008 or you wouldn’t qualify for the new version of income-based repayment, wait to consolidate until negotiated rule making happens. You want to weigh all your options.  Take your time in choosing the best plan for you. Choosing too early can be a costly mistake.

Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.

Is My Spouse Legally Responsible for My Loans?

No. Student loans do not go on each other’s credit reports when you get hitched. Your loans stay with the individual that borrowed the money, and remain that way through single life, marriage, and divorce.

Whose Federal Loans Do We Pay Off First?

There are two sets of answers to this question. The communal method suggests looking at you and your spouse’s loans as belonging to you jointly. In this scenario, you pay off any private student loans first, since these loans can change in interest over time – similar to a credit card  – and have fewer hardship repayment options. If neither of you have private student loans, then you should pay off your highest interest rate loans first – unless one of you qualifies for income-based repayment. (We’ll go deeper into income-based repayment later in the article).

The other answer applies to couples who are newly married or will keep finances relatively separate. Since your spouse isn’t legally responsible for your student loans, you may not want to work together to pay off your honey’s loans before your own – no matter what the interest rate difference is. Thus, you have several options under the individual theory. Each of you pays your student loans out of your own paychecks. To pay off your student loans together (but not one person’s debt before the other), you can try the equal amounts system.  Set an amount above your minimum payments that goes towards each of your debts. For example, if you have $200 total between the two of you for speeding up debt repayment, add $100 to your individual loan payments.

While it may seem unromantic to think of your loans as individual property, there are long term benefits should you ever get divorced. There are circumstances where you would qualify for a temporary break from loan payments, reduced payments, or loan forgiveness personally, but not if  listing your partner’s income.

Will Marital Income Affect Income-Based Repayment Options?

Yes. If you file a joint tax return, you’re combined adjusted gross income (AGI) determines your eligibility for income-based repayment. For example, let’s say your AGI is $10,000 this year while your spouse’s is $60,000. Each of you has $50,000 of federal student loan debt at 6.8%. If you filed individually, you’d pay $0 on income-based repayment. Your spouse pays $475. If you filed a joint return, you’d each pay $300. This reason alone isn’t a good reason to file separately, but it’s a reason to compare filing options at tax time. If you utilize TurboTax or other tax software, fill out both individual and joint returns and then file whichever option works out better for you each year.  

Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.

The annual US News and World Report college rankings are out, and I always like to imagine the full list read at a press conference by Casey Kasem. Also, at this imaginary event, Kasem would point out that it would be a tragedy for your family’s financial health and your child’s future to send your kid to most of the colleges on the list.

Let’s recap a few facts about student loan debt:

• -The average student in 2009 (the most recent data available) graduated with $24,000 in loans, according to the Project on Student Debt. Graduates of private colleges have more debt, on average; graduates of public colleges have less. Students who attend for-profit colleges rack up the most debt: $33,050 per student in 2008.
• -As of 2010, there’s more outstanding student loan debt than credit card debt. MintLife’s John Ulzheimer noted the shift in his column last year.
• -Unlike credit card debt, student loans (whether federal or private) can’t be discharged in bankruptcy. They will follow you around forever. Federal loans have gentle repayment options like income-based repayment; private loans don’t.
• -Default rates on student loans are huge. Of the loans that entered repayment in 2009, 8.8 percent were in default by the end of 2010, according to the Project on Student Debt. When you default on a student loan, it doesn’t just wreck your credit: the loan continues to accrue interest, fees, and penalties.

So you want to avoid student loans. But you also want to avoid traffic jams, overpriced coffee drinks, and friend requests from old boyfriends. Here in the real world, is it possible to send your kid to a good college without saddling them (or yourself, via parent loans or home equity loans) with tens of thousands of dollars in debt?

You bet.

College matters. Which college? Doesn’t matter.

The key to graduating with little or no debt is your local public university. Mine is University of Washington (US News #42), where I graduated debt-free in 2002.

Given the current job market, though, isn’t it true that only top colleges get you the top jobs?

“There’s a complete lack of evidence that your kid will benefit from going to one college versus another,” says Zac Bissonnette, author of Debt-Free U and recent debt-free graduate of the University of Massachusetts (#94 on the US News list).

That’s quite a claim. But the academic research bears it out. Princeton economist Alan Krueger was the first to rigorously determine that there’s no good reason to go to, say, Princeton. His research was highlighted in 2000 in the New York Times under the headline “Children smart enough to get into elite schools may not need to bother.” He revisited the data in 2011 and the conclusion is the same: if you’re accepted to an elite college but end up attending a different college, it doesn’t affect your earning capacity whatsoever. Kids smart enough to get into Princeton wring a world-class undergrad education out of San Diego State.

Yes, I know a public university isn’t the same as a verdant liberal arts campus. But what the average student 18-year-old knows about the difference comes from drive-by campus visits and photos on the Carleton website. “The correlation between people’s satisfaction with their freshman year and how much they like their roommate is very, very high,” says Bissonnette. “Your experience is determined by these weird, idiosyncratic things that just happen.”

Furthermore, we know (from Noel-Levitz survey data) that satisfaction rates for students at public universities and private universities are the same. (Students at two-year community colleges are more satisfied than either.)

Get out of the middle of the road

Public universities aren’t the only option for the frugal and academically motivated. The most elite, Winklevoss-infested schools are lavish with financial aid. Harvard students get out with much less debt than average (about $10,000 as of 2008, according to the Project on Student Debt).

Harvard, along with a couple dozen other schools, makes a financial aid pledge promising only grant and work study aid for students who qualify for financial aid. Read the fine print, though: not all pledges are equally generous, and many students end up borrowing anyway.

“Where people tend to get hit really hard with the debt is in the middle,” says Bissonnette. “It’s in those private colleges that are a tier or two or three below the most elite colleges.”

We’re talking places like American University (average graduate’s debt load: $36,206, U.S. News 2010 data) or Cleveland Institute of Art ($30,188). Oh, and Bissonnette loves to pick on NYU ($41,375). Many of these schools are safety schools for kids applying to the top-tier pledge schools, but this is a dangerous move: Columbia and NYU are both in Manhattan, but when it comes to financial aid policy, they’re in different worlds.

No college—with the exception of the military academies, which charge nothing and guarantee a job upon graduation—makes it easy to graduate debt-free. Doing so requires saving, family sacrifice, and taking a job (federal work study or otherwise) during school. Students can and do rack up huge debts at public universities and financial aid pledge schools. And I know public school tuition is rising even faster than private school tuition.

But it remains possible for a dedicated middle-class student to make it out of a public or pledge school without a penny of debt, essentially an impossible feat at a mid-tier private or for-profit college.

It’s about options

If you’re uncomfortable measuring the value of a college education in dollars, join the club. I know there’s more to life than money. Before going to a public university and paying tuition in cash, I attended (and dropped out of) Pomona College (US News #4), a small liberal arts college in Southern California. I sang in a band, met my future wife, ordered lots of midnight pizza, occasionally went to class, and left with a good chunk of debt. (Pomona is now a financial aid pledge school.)

Like any parent, I want my daughter (class of 2026) to have the same options that I did and more. And I don’t want to be the kind of parent who never lets her learn from her own mistakes and is constantly interfering in her adult choices.

My wife and I have talked about it extensively, however, and we’re not going to send our daughter to American or NYU or any other school that will have her starting her adult life $40,000 in the hole. It would be heinously irresponsible. With any luck, she’ll want to attend her parents’ alma mater, and we won’t even have to discuss the matter. (Yes, that was a joke.)

Debt wraps a noose around your options. Tell your kids that going to a college that lets them graduate debt-free won’t lower their earning potential, but it’ll make it a hell of a lot easier after college for them to live the kind of globetrotting, artsy, nonprofit life that drives parents crazy.

And they can do it for longer than four measly years.

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.

First things first… last year total outstanding student loan debt surpassed credit card debt in the United States.  Those of you with student loans are collectively in over $800 billion of debt.  And unlike credit card debt, most student loan debt will hang out with you until you pay it…or you die.

Two weeks ago I wrote about the number of credit scores we all have.  A reader named Grant commented on my post and asked a variety of questions about how student loans impact your scores and how best to deal with them. His questions and the timing of his questions were excellent so it warranted an entire article.  Further, my contact at Mint pointed out that the students who graduated this past spring are about to start having to pay back their loans, assuming they had a six-month deferment period. So, thanks to Grant for submitting the following questions…

Q)  Can paying off student loans early hurt your credit score due to the length of the loan?

A)  No, this is a common credit scoring myth.  Paying off your loans early doesn’t have any impact on the age or “length” of the loan.  A loan opened 3 years ago is still 3 years ago regardless of whether or not it’s paid off, paid off early, or still unpaid.

Q)  Can paying student loans early hurt your credit score since banks want the full amount of interest?

A)  No, the “banks” don’t control your credit scores like that so they can’t harm your score because they’re not getting the full amount of interest.  Further, the amount of interest you pay (or don’t pay) is not reported to the credit bureaus so it’s systemically impossible for it to have any influence on your credit scores.

Q)  Can paying off your student loans early hurt your scores because of the decrease in the average age of accounts?

A)  No.  The answer to this question is essentially the same as the first one.  The average age of your accounts, which is important to your scores, takes into account open and closed accounts equally.  As such, paying any loan off early (and then closing the account if it’s a credit card) has no negative influence on the average age of your accounts or your credit scores.

Q)  Can student loans be reported in “triplicate”, so one loan looks like three loans?

A)  This is a possibility.  Student loans are often reported on a disbursement by disbursement basis.  So, if you’re in school for four years and you get one student loan per year or per quarter or per semester…each of those disbursements of funds can be reported as a unique loan on your credit reports.  So, if you have 8 loans over four years…yes it can show up 8 times on your credit reports.

Q)  Does consolidating student loans help your scores?

A) It certainly can.  If you can eliminate multiple accounts on your credit reports and replace them with only one loan, albeit for the full aggregate amount, then you’ll likely improve your scores because you’ve eliminated several accounts with a balance.

Q)  Does it make sense to pay off the smaller loans faster to reduce the number of loans?

A)  Most certainly.  If you’ve got small loans and larger loans and you can knock out the smaller loans without compromising things like savings and emergency funds then go for it.  It will eliminate accounts that have balances, which is always a good thing for your credit scores.

NOTE: The strategy to increase your scores by eliminating accounts with balances will work if you can pay off small credit card balances as well.  Some people use multiple retail store cards and run up small nuisance balances because they think they have to use the store’s card instead of a general use credit card for all of your purcahses.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.

When one of our loyal users wrote to us with a question about funding his graduate studies, we knew just to whom we should refer him: Reyna Gobel, our education blogger and author of  Graduation Debt: How To Manage Student Loans and Live Your Life. Here’s our user’s original query and Reyna’s full response:

Dear Mint,

I’m starting a post-baccalaureate pre-medical certificate program in the fall and would really appreciate your advice and thoughts on how best to pay for my education. I’ve already obtained a Bachelors from the College of William and Mary (2008), have applied for and received some funding through FAFSA, but still need to cover my cost of living for the coming year.

VCU does not offer Federal PLUS loans, otherwise I would have applied for those. Do you have any advice?

– Andrew

Hi, Andrew.

Unfortunately, some schools offer direct loans, but do not offer  PLUS loans – the extra loan funds awarded beyond grants and direct loans for parents and graduate school students. However, you do have options.

In talking to Andrew, I learned he has enough money to last at least a couple of months while he weighs his options. This gives him time to acquire private loans if needed, calculate his expenses to see how much he needs to borrow for living expenses, and research graduate assistantship and part-time work opportunities.

Evaluate Goals

Since Andrew’s goal is to attend medical school after completing his graduate certificate, his top priority is getting the grades he needs to further his education. Medical school admissions are highly competitive. He called his academic advisor who let him know he could work 10 to 20 hours per week while managing his coursework.  Andrew has decided to err on the cautious side and look for a job that will improve his appeal to medical schools with 10 or fewer hours per week. He’s also pursuing scholarships to reduce borrowing for future semesters.

Determine How Much to Borrow

In Andrew’s case, he doesn’t know his living situation just yet and he’s applying for jobs. He needs to talk to his friends who live in the area to get a feel for what it costs to live in Richmond, Virginia, where the campus is located. Once he knows the true cost of living and constructs his own budget, then he can determine his personal cost of living for the semester. He should borrow this amount and use income earned from his job to pay interest while in school or pay back part of his loan early. He shouldn’t rely on part-time income until he starts his new position and feels secure. Andrew can always borrow less next semester because he can apply on a semester instead of yearly basis.

Since the process of applying for and receiving private student loans from a university disbursement can take up to a month or two, Andrew needs to apply at least two months before he needs money. Income can be a factor in private student loan credit decisions if he chooses not to use a cosigner, so he should apply before he leaves his current job to attend graduate school.

Research and Apply for Private Student Loans

Andrew has good credit and doesn’t need a cosigner, but if he does at a later date he should look for loans where you can remove a cosigner after a specified number of on time payments. Andrew has Sallie Mae federal loans so he starts his search with Sallie Mae private loans.  Sallie Mae loans offers loans with the ability to remove cosigners after 12 months of on-time payments, has zero origination fees, and a 2 percent rebate on payments made before graduation.

Andrew will compare these terms and the interest rate offered to him with what is offered by other banks by going to FinAid.

Additional Options If You’re Not Andrew

If you are not Andrew and your school doesn’t offer PLUS loans, follow the same procedures. If your school does offer Federal PLUS loans, apply for these loans first. Federal student loans offer fixed rates as opposed to variable rates where your payment can go up or down based on prevailing interest rates.

Good luck Andrew and to everyone else on their way to grad school this fall!

– Reyna

Photo: David M. Goehring

I posted a question on my Twitter account a few weeks ago and I was pleasantly surprised to get dozens of answers to my impromptu credit quiz. In fact, I got so many that I decided to fashion it into an article and hopefully prompt some more discussion on the matter. Here’s the pop quiz…

“Name an installment loan (fixed payments for a fixed period of time) where you DON’T own the asset when you’re done making payments.”

Here are the top five answers I received, in order of frequency;

1. Student Loans

I was surprised to see this as the number one answer, but not that surprised. The topic of whether or not to borrow a lot of money to go to college, thus incurring installment debt, is a lightening rod, to say the least. Here’s an article I wrote for Mint last year where I blasted the idea of taking on a lot of student loan debt for the sake of going to an expensive school. And, in turn, got blasted back by about a fourth of the 130 comments that were posted.

I don’t think you can say that an education and a degree aren’t assets. But, I do think you have to consider the “I didn’t got to college and I’m still successful” argument, which is possibly why so many people think student loans don’t yield any sort of asset. In the strictest definition of an installment loan, an education isn’t tangible and it doesn’t secure any sort of loan obligation. I mean, a lender can’t repossess your knowledge for non-payment. Semantics, I know.

2. Auto Leases

Now we’re talking. Borrowing money to buy a car is one of the worst investments you can make because of the quickly depreciating value of the asset. But, at the very least you’ll own the car after 36, 48 or 60 months of payments. With a lease you’re essentially renting a car for some fixed period of time.

Even when you’re done making lease payments you don’t own a thing. In fact, in many cases you’ll owe still more at the end of the lease because of mileage that exceeds the maximum contractual allotment. If you like a new car every few years then leasing is a good option but you’ll be making car payments perpetually. If you want to drive something supercool every once in a while then call HERTZ instead. You can give it back at the end of the weekend.

3. Rent

Correct. You own nothing after satisfying your rental agreement, which is technically an installment agreement. The tenant gets a place to live (the “extension of credit”) and makes an equal payment to the landlord (the “creditor”) for a fixed number of months per contract (the “loan term”).

Don’t get me wrong; there are tens of millions of homeowners who would rather be home-renters right now because they’re upside down on the home loans. That’s a familiar position to be in with auto loans, but not mortgages. Tax deduction notwithstanding, renting ain’t a bad deal right now.

4. Title Loans

Good one. You know what these are, right? You take your car title (yes, you have to have clear title in hand) to this vulture of a lender who then gladly let’s you borrow about 50% of your car’s appraised value and expects you to smile about it while he hopes you default.  You make payments of some amount over some period of time and you get your title back.  I fully agree that a car’s title is a tangible asset, but you’ve already earned it by paying off another loan.  Buying it back again…not so much.

5. P2P Lending

Yes, and no. P2P loans (peer-to-peer) occur when you borrow money from another person or group of people who act as the “lender” in the transaction and cobble together the funds to lend. There are several sites that facilitate P2P loans but since I’m not a fan of them I’ll let you find them on your own.

Peer-to-peer loans are, in fact, installment loans and some of them are attached to an asset. Some P2P loans are taken out to pay for orthodontic work, business equipment and yes, even plastic surgery. Still, just as many are taken out to pay for vacations and other non-tangible items. Regardless, defaulting on a P2P loan won’t result in the consumers/lenders showing up at your door. I think that’s a contributing reason for their high default rate … it’s hard to think about Joe the Consumer Lender like you think about Wells Fargo or Citibank.

What about plastic?

I’m a little surprised, and worried, that nobody listed credit card debt as not being tied to an asset. Have you ever heard of a credit card issuer repossessing clothing, vacations, dinner out, or anything else charged on a credit card?

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow him on Twitter here.

(iStockphoto)

A few years ago, I found myself in a state of career transition. As I looked for a company that would hire me solely on the basis of having a few skills and a lot of promise, I was forced to listen to a barrage of advice from those closest to me. The overwhelming prescription for curing my professional ills? Graduate school.

My boyfriend encouraged me to go get a Master’s in English. My parents cheerily reminded me that my alma mater offered MFA degrees in acting. Some even suggested that I get an MBA, since “those are always useful.”

Just to be clear, I already have a BFA in acting. I worked in the entertainment business and eventually became a full-time writer. How’d I do it? Instead of going to graduate school for an English or creative writing degree, I worked my butt off and eventually had enough experience to get editorial jobs. Mission accomplished, and with no extra debt in sight.

But sometimes it feels like, as a person with only a bachelor’s degree, I am in the minority. Many of my Gen Y peers have multiple BAs, BSs, MFAs, PhDs, and MBAs, as well as an alphabet soup of other educational achievements. I know a couple of girls in their early thirties who have more degrees than jobs on their résumés.

You Can Go Home Again

Especially in times of economic turmoil, graduate school can seem like a pretty sweet idea. Can’t find a job? Get another degree! It lures you into a sweet, warm cocoon of security, a place where you can focus on higher learning for a few years while forgetting about the big, bad, scary world outside. School feels familiar. School feels safe. It’s become a de facto economic indicator, just like lipstick and hemlines, of terrible times—as the economy falters, applications to grad school inevitably increase. Everyone seems to have the same idea: get ahead of the pack by getting extra degrees. And if you’re already unemployed, why not fill in the hole in your résumé with some schooling?

Because it’s not a guarantee of future success or earning potential. To be sure, there are some careers that absolutely require an education beyond a bachelor’s degree, law and medicine among them. If you want to be any kind of psychologist, therapist, or counselor, you’ll need a master’s in psychology or social work, at the very least. Librarians need master’s degrees, as do those who work in public policy, academia, or the hard sciences. Postsecondary teachers need master’s degrees or PhDs, and even elementary and high school teachers need a master’s in some states.

But a lot of the degrees that people end up getting are next to pointless. (Sorry, Russian-literature majors.) In a 2007 analysis of master’s degree programs and their usefulness, MSN Money columnist Liz Pulliam Weston found a definite salary bump for those with a master’s in fields like science and engineering, while conversely, master’s degrees in the liberal arts and humanities had almost no payoff. (She actually discovered that people with liberal-arts master’s degrees earned less than those with only a bachelor’s degree.) So don’t believe recruiters who tell you that another degree in art history or philosophy will make you a more attractive job prospect.

Even the vaunted MBA isn’t immune to criticism. Although it’s generally considered a worthy investment since many graduates significantly increase their salary upon graduation, there’s no evidence that an MBA from an inexpensive public institution is any less valuable than one from a prestigious private university. The difference between top MBA programs like Columbia or NYU and those at large public universities is mainly the connections and networking opportunities that are available.

A Professional Student

Before you commit to graduate school, it’s important to take a long, hard look at why you’re going and what you expect to get out of it.

What are your goals?
Before you set out to earn an advanced degree, education experts recommend that you have very clear and specific career aspirations. Get a master’s because it’s a requirement for the exact job you want, not because you think it might make you more marketable in a general way. If you don’t have a well-defined path, or if the job you want doesn’t really require advanced education, the better choice might be to simply keep pursuing jobs or to take night classes to boost your knowledge. Most humanities, liberal arts, and creative careers fall into this category. What these careers demand is experience, and all the education in the world can’t make up for a lack thereof.

However, while being a writer doesn’t require any specific degree, if your goal is to be the editor-in-chief of the New Yorker, a master’s might come in handy. Likewise, that art history degree is probably a good idea if you aspire to be the chief curator of a major museum. If you aim to work at the absolute highest levels of your industry, advanced education makes more sense.

What return will I get on my investment?
By going back to school, you’re investing both money and time, so you want to be sure that when you emerge from the program you’ll have spent both wisely. Are the expected financial rewards worth the investment? An Ivy League MBA is expensive, but if your goal is to work on Wall Street, you’ll probably recoup those costs rather quickly. However, if you intend to work in a moderately paid area, such as philanthropy, you would do better with a reasonably priced MBA from a state school. In other words, don’t take on $100,000 of debt if your anticipated starting salary after graduation is only $60,000. The financial rewards of being a doctor make an expensive med school worth it—not so, the rewards of being a social worker or school psychologist.

Am I just afraid?
Do you want to go to graduate school because your career depends on it, or are you just unsure of what else to do? Many people love not only the intellectual stimulation of school, but also the feeling of safety it affords. It can be tempting to hide from the job market for a few years, but if the end result is emerging from school just as unprepared for a career as you were before, it’s probably not a smart decision. At that point, you’ll be in more debt, you’ll be older, and you’ll have that much less experience than your peers in your industry.

There’s nothing inherently wrong with education, of course; most people find master’s programs personally fulfilling, even if the programs don’t turn out to be career boosters. But the important thing is to make the decision in line with your future goals. You may be happy with the knowledge you gain in graduate school, but you probably wouldn’t like emerging from school with a mountain of debt and another low-paying job.

For me? Not going to graduate school is the best decision I ever made, and I routinely counsel aspiring writers against it. If I’d joined a master’s program in 2007, I’d have only recently graduated, in debt and with no more discernible job experience than when I started. Except instead of being twenty-seven, I’d be thirty, and instead of having one useless degree, I’d have two.

More Education, More Problems? The Myth of Grad School was provided by DivineCaroline.com.

Attention, Class of 2010: the clock is ticking. If you graduated college in May and have federal Stafford loans (subsidized, unsubsidized, or both), your six-month grace period before student loan payments start ends this month.

Have you carved out a space in your budget for your student loan payment? Don’t panic. Follow the seven steps in this article, and you can secure an affordable payment on any budget. You’ll also learn how to postpone payments if you need it.

Gather a List of All Your Servicers

Knowing how much you owe and to whom is the first step towards repaying student loan debt. That sounds simpler than it really is. As of July 1, 2010, all federal student loans are issued by the federal government’s direct loan program.

But if you borrowed before that — and if you graduated college this year, then you did — you could also borrow federal student loans through other lenders, via the Federal Family Education Loan program (FFEL). The rates and the majority of the contract terms on these loans were the same as those of the federal government’s program.  But there is the logistical hassle of borrowing through different lenders each semester or academic year.

The good news is, you can find the contact information, total amounts borrowed and interest accrued for any federal student loan relatively easy: just log into the National Student Loan Data System.

Look for the numbers of the loan servicers instead of lenders on your Student Loan Data System report. Think of the servicers as the customer service representatives for lenders.

Determine Timing

According to the Department of Education, your first payment can start anytime after your grace period ends. Before you start comparing repayment plans, find out when your first payment(s) are due. You don’t want a late payment on your credit report because you were analyzing various repayment plans long after your due date. If you haven’t received a letter with your due date and the amount of your payment, call your servicers immediately and ask for your due date information. Also ask about current processing time if you decide to change this payment plan to a more affordable one.

Use Calculators and Review Payment Plan Options

Now that you know how much you owe and to whom, you can calculate your payments with different payment options. You can find calculators for the three main types of loans on the Articles and Resources page of Graduationdebt.org. To learn about the major types of repayment plans, take a look at “Take Charge of Your Student Loans: Choosing the Best Repayment Plan” at Mint.com.

If you can’t afford to pay off your loan in 10 years, pick a different plan. Don’t worry about the length of the payment plan. You can pay off your loan early if you can afford it a later date, but having a monthly payment that’s too high for your budget can prevent saving money for emergencies or even push you further in debt.

Budget with Your Student Loan Payment Included

If you use Mint.com, add in a category in your budget for your student loan payment before it’s due.   See where you stand by different payment plans. You can also do this with your paper budget as well. Since you won’t have months to review your budget, you’ll have to take the speediest route to reviewing and tweaking your budget.

Choose a Repayment Plan

Once you’ve run the numbers on your repayment plan options, it’s time to pick a plan. Call your servicer at least five days prior to the due date to choose a plan: the sooner, the better. Processing time and form requirements vary depending on your servicer. You always have to fill out an online or paper form for consolidation, but not always for changing to an extended payment plan. For instance, Sallie Mae (SLM) currently doesn’t require paperwork for extending the length of your loan repayment, but Direct Loans does.

Temporary Payment Reprieves

If your budget isn’t ready for your student loan payment just yet or the student loan repayment option change you request will not be completed before your first payment is due, you still have forbearance and deferment when you need it – temporary payment reprieves.  Talk to your servicer about the best option for your situation.

Follow Up

Follow up with your servicer before your first payment to insure any repayment plan changes are processed. Periodically review your budget goals to see when you may need a payment reprieve or a new payment plan. How well you self-monitor your loans determines how stressful paying off your student loans will be.

Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.