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          Being in debt while you are still working can be a nagging problem and even prevent you from saving for retirement. But carrying that debt into retirement can also be dangerous, and in some cases, even more so. When you are in retirement, you are working with a fixed income. The simple truth is, you can't afford to have a majority of your income eaten up by debt payments. To get the most out of your retirement, you need to make sure you have as much money as possible to fund the lifestyle you desire. Here are three types of debt you should work on eliminating before you retire. Read: How To Save For Retirement When You Are Self-Employed UNSECURED DEBT If you are living with a fixed retirement income, you might not be able to afford to make the extra payments on the money owed. If you are spending years in repayment, much of your fixed-income ends up going to high interest payments. Credit card debt can not only wreck your credit score, but it's also costly to pay off. For example, if you have a credit card with a $5,000 balance with 18% interest, it will take you roughly 84 months to pay it off. Not only that, but you will pay close to $4,320 in interest over that period. HOW TO PAY IT OFF It's best to come up with a plan to eliminate unsecured debt during your working years. An easy approach to paying off credit card debt is to list out your present debts, figure out which cards charge the most interest and pay those off first before moving on to the ones with less interest. Here is a list of articles that will help you come up with a plan to pay off credit card debt: Pay off Debt With the Debt Snowball Method How to Pay Down Debt Using the Avalanche Method How to Create a Plan to Pay Off Debt Taking advantage of balance transfers to eliminate debt faster might also be an option. You can transfer your total balance to a card with a lower interest rate than what you are currently paying to save time and money on interest payments. Read: Saving Money When You Have Debt – What You Need to Know STUDENT LOAN DEBT Student loans are often viewed as a "younger-aged" problem, but the truth is, more and more older Americans are finding themselves on the hook for educational loans. Not only is this debt they took out for themselves, but the major problem is when parents take out loans for their children's education. The process of being accepted for a Parent PLUS loan is minimal. There is only a basic credit check and no underwriting to determine whether the borrower has the income or ability to repay the loans. With emotions involved, it's easy to take on more than you can handle. You may not realize it, but in retirement, even a small amount can prove difficult to repay. Funding your child's education can be an emotional topic. I would love to help my son attend college without feeling financially stressed, but I won't sacrifice my own retirement to do so. Instead, I took another approach and started planning and saving early for his educational costs. Two weeks after my son was born, I opened a UTMA account. Throughout the year, I save my leftover change from my cash spending and invest it in his UTMA at the end of the year. I will save what I can during my working years, and I will help him as much as I can financially, but only to a limit that I can honestly afford. The truth is, helping my son pay for his education is important to me, but he also has more time than me to pay off his student loans. When I am a senior living on a fixed income, I will not be able to generate more money to repay these debts, and I can't replace the retirement savings that I take out for repayment. HOW TO PAY IT OFF When you are in a financial bind, there are different ways to you can repay your student loan debts that make it a little easier on your budget. For example, if you only have Direct Loans, there are Income-Driven repayment plans that allow you to make a monthly payments that is based on your income and family size. If you decide to use one of these options, you have to keep in mind that it will extend the period of time for your loan repayment. I recommend using these options if you are in a financial hard spot, but to make your time on these plan limited. If you can, I recommend sticking to the Standard Repayment Plan, which will pay of your student loans in the shortest amount of time while saving you the most money on interest. Read: Should You Consolidate Your Student Loans? MORTGAGE DEBT Many people who own homes or property take out 30-year mortgages in their early 30s and manage to pay off their loans by the time they retire. But what happens when you buy a home or property later in life? If you end up carrying mortgage debt into retirement, that will make what's already your greatest monthly expenses even more burdensome. Just like with people, the older a home becomes, the more money it costs to keep them "healthy." Dealing with a mortgage payment and the upkeeping costs of owning an older home during retirement can cause substantial income restrictions. If you work on getting rid of your mortgage payment before retirement, that's one significant bill you don't have to worry about. If you can pay off your mortgage before retirement, you can significantly decrease your housing costs, eliminate your biggest expense, and you can make your savings last much longer. If you can, try buying a home on the low-end of what you can afford and avoid refinancing your home, which usually extends your repayment period. HOW TO PAY IT OFF One way to tackle your mortgage debt is by making extra payments to your loan. Think of it this way, the more extra payments you make on your mortgage, the more each one of your regular payments goes straight to the principal balance. Try making an extra house payment every quarter or dividing your mortgage payment by 12 and add that amount to each monthly mortgage payment that you make. Just a word of caution. If you are thinking about making extra mortgage payments, make sure you talk to your mortgage company because they might charge prepayment penalties. When completing an extra mortgage payment, make sure it's getting applied to the principal balance of your loan and not next month's payment. It's critical to take steps to ensure you have an effective debt management strategy in place and to take early action steps to eliminate debt before you retire.

          3 Debts You Should Eliminate Before Retirement

Should You Consolidate Your Student Loans?

October 12, 2016
DEBT & CREDIT

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Are you thinking about refinancing or consolidating your student loans? If you are, there are some things you should know first. We are talking about Federal & Private student loans, the pros and cons, and the things you need to know to make the right decision.

Do you feel crushed by your student loans? Trust me; you are not alone. According to student loan expert, Mark Kantrowitz, 7 in 10 seniors will graduate with an average of $37,172 of student debt in 2016. Before they even enter the workforce, they are suffocated and limited by high student loan payments.

I know all about this feeling. For the last two years, I have focused solely on my high-interest credit card debt. It is my personal goal to have all credit card debt erased by the end of this year. While I tackle one debt, another awaits. My student loan debt is around $28,000, and I have a drastic plan to pay it off in 2017.

If you are like me, the thought of paying hundreds of dollars each month on college loan repayments is an absolute nightmare. Some people who spend more money repaying their student loans than they do on groceries, utilities, and gas combined. With the fear of never-ending payments, you might have thought about consolidating your student loans.

Consolidating your student loans can be beneficial in a lot of ways, but there are also some downsides to this strategy. If you have been wondering, “Should I consolidate my student loans?” then here are some critical things you should know before actually signing the dotted line.

1. KNOW WHAT KIND OF LOANS YOU HAVE

There are many types of student loans out there, and depending on your personal situation, you could have any one of them. Here are the important ones you need to know:

FEDERAL STUDENT LOANS

Federal loans are loans that are funded by the federal government. With these types of loans, you will not have to start repaying them until you graduate, change your enrollment status to less than half-time, or leave school. They offer a fixed interest rate, and they do not require a credit check. The interest you pay on federal student loans is usually tax deductible. They offer many different repayment options with no prepayment penalty fees. These loans may be forgiven if you work in public service.

PRIVATE STUDENT LOANS

Private loans are not funded by the government and are made by a private lender such as a bank or credit union (in some cases the school). You may be required to pay back your student loans while you are still in school and they might carry variable interest rates. That means you might be offered a loan with 10%, but it can drastically increase in the future, some greater than 18%. You also might be required to have an established credit report to qualify or a cosigner. Interest may not be tax deductible like federal student loans, and they don’t have nearly the same options when it comes to repayment. There also might be prepayment penalty fees, and there is also a greater chance that the lender will not offer any forgiveness programs.

DIRECT SUBSIDIZED & UNSUBSIDIZED LOANS

These are a form of federal student loans that are available to students who need help paying for higher education at a 4-year college or university, community college, or technical school. There is one difference between these two loans that I want you to be aware of. With direct subsidized loans, the U.S. Department of Educations pays the interest while you are in school at least half-time, for the first six months after you leave school or if you decide to postpone your student loan payments (deferment).

With direct unsubsidized loans, you are responsible for paying the interest during all periods of your education. If you choose not to pay the interest while you are in school or during times where you decide to defer the payments, the interest will accrue and will be added to the principle amount of your loan (capitalized).

You might be asking why this is important information to know.

If you have federal student loans, you might have benefits and protections that do not transfer to private lenders for consolidation. For example, your federal student loans can be forgiven if you work in certain types of industries. If you decide to consolidate, that benefit may no longer be available to you.

It’s always important to know what you are dealing with before you make any decisions.

  • Related: 7 Ways to Pay Off Student Loans When You Can’t Afford the Payments

2. UNDERSTAND WHAT IT MEANS TO REFINANCE OR CONSOLIDATE

When you refinance or consolidate your student loans, you essentially take all of your current student loans and roll them into one large loan. Your old loans are paid off, and you continue to make payments toward your new loan. This is particularly helpful if you are juggling three different lenders and twelve different loans and are having a trouble keeping track of what amounts are due when.

When you consolidate your federal student loans, you can to do it through the Department of Education via the Direct Consolidation Loan. If you are combining your student loans for the main reason of saving on interest, this option will not help you. This consolidation loan has a fixed interest rate for the life of loan which is based on the average interest rates on the “old” loans being consolidated, rounded up to the nearest one-eighth of 1%.

If you decide to refinance your private or federal student loans with a private lender, you have the ability to refinance to a different interest rate (depending on your credit score). This works out well if you have several high-interest student loans. This can save you thousands of dollars over the life of the loan if you can refinance for a lower interest rate.

3. KNOW THE PROS & CONS

PROS

  • The ability to apply one interest rate to all of your loans, even if they originally came with a variable interest rate.
  • You can extend the length of your repayment period to lower your monthly payments.
  • You simplify things by making one payment to one lender.
  • Multiple repayment plans.

CONS

  • The potential loss of valuable benefits (loan forgiveness, flexible or income-based payment options, or deferments).
  • Potentially higher interest payments.
  • No turning back. Once you consolidate or refinance your student loans, there is no going back.

There are some important things to note. By extending your repayment period, you lower your monthly payment now, but you will also pay more interest over the life of the loan. If you refinance your student loans with a private lender, keep in mind that the interest rate they offer depends on your credit history and score. You are not guaranteed a lower interest rate when you decide to refinance.

IS MY CREDIT SCORE AFFECTED?

It might in the beginning. Refinancing will trigger a hard inquiry on your credit report (similar to opening a credit card). This could negatively affect your score by a couple of points, and it can remain on your report for two years. Though there might be a negative impact, in the beginning, there is a tremendous opportunity to improve your credit score. You make the biggest positive impact by continuously making on-time payments. If you are struggling to make payments on time, consolidating your loans for a lower monthly payment might help. It’s also important to note that opening a new account will lower your average account age, which makes up about 6-7% of your credit score.

  • Related: How to Create a Plan to Pay Off Debt

4. WHEN SHOULD YOU CONSOLIDATE OR REFINANCE?

There are many reasons to consolidate or refinance your student loans.

If you are stuck paying high variable interest rates, refinancing your loans to take advantage of a lower fixed interest rate might make a lot of sense. SoFi is one of the leading companies to offer student loan refinancing, and they offer interest rates that are hard to beat. The one thing that I love about SoFi is that you can check your interest rate without impacting your credit score. They initially pull a soft credit pull and only require a hard inquiry if you are happy with their terms and decide to move forward. Filling out an application is 100% free and only takes about 5 minutes.

If you are struggling to make ends meet, extending your repayment plan can give you some temporary relief. I say “temporary” because I only recommend doing this for a limited time. You should ALWAYS begin making extra payments when you can.

Keeping your finances simple makes it easier to manage, and that’s hard to do when you are juggling several lenders and loans. Things are less likely to slip through the cracks when you are making one payment to one lender.

5. KNOW WHAT TO DO NEXT

Just like any significant financial change or decision, I always recommend crunching the numbers for your particular situation. There are a lot of private lenders that have estimated repayment calculators on their website, or they might allow you to get a quote with a soft credit pull inquiry (which means your credit score won’t be affected).

I also recommend calling your current loan provider and asking what benefits would be lost if you decide to refinance or consolidate your student loans.

Always be careful of scams. Steer clear of ANY company that charges a fee to consolidate your loans for you. Consolidating or refinancing your loans can be done without a fee and you should always be cautious.

If you are wanting to crunch numbers to see if consolidating or refinancing your student loans is the best option, I recommend starting with this Loan Consolidation Calculator from FinAid. It’s an easy way to see what your monthly payment will be based on different repayment terms and interest paid.

  • Related: How to Pay Down Debt Using the Avalanche Method

MOVING FORWARD

Consolidating or refinancing your student loans is a huge decision that you should not take lightly. Once you consolidate or refinance your student loans, there is no turning back. Your old loans will be paid off and are gone forever. Once you have done your research, know what loans you have, and you have called your loan provider to ask any loss of benefits, then I recommend moving forward. Once you have made your decision, you can take these following steps:

  • Apply for a Direct Consolidation Loan. This is done through the Department of Education, and can only be used for Federal student loans. Fill out this form, which is completely free, requires no credit checks, and takes about 30 minutes. If you need help filling out the form or have additional questions, you can call 1-800-557-7392. Make sure to read the information carefully and thoroughly understand the terms.
  • If you want to refinance your student loans with a private lender, I suggest looking into SoFi first. You can refinance Private or Federal student loans, but it’s important to remember that refinancing your Federal loans causes you to lose repayment assistance programs offered by the government. Make sure you call your loan provider before you make the decision to refinance.

If you have both Federal and Private student loans, I do recommend that you keep them separate. It is possible to consolidate your Federal loans using the Direct Consolidation Loan and then refinance your Private loans with a private lender, such as SoFi. Yes, you might have two different lenders, but it might be worth it if you find out that you are losing important or useful loan benefits.

Have you considered refinancing or consolidating your student loans?

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kumiko Ehrmantraut

kumiko Ehrmantraut

A little about me: I love helping women take charge of their financial lives. As an Accredited Financial Counselor, I love teaching about money management and realistic budgeting. Away from the computer, you can usually find me behind a camera lens or coloring with my 4-year-old son.Want to share your financial journey with me? Tag @thebudgetmom on Instagram or give me a shout-out on Facebook. I WANNA SEE IT!
kumiko Ehrmantraut
kumiko Ehrmantraut

kumiko Ehrmantraut

kumiko Ehrmantraut

Latest posts by kumiko Ehrmantraut (see all)

  • Lifestyle Inflation: Getting What You Deserve - February 15, 2019

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Filed Under: DEBT & CREDIT, Loans, Etc. Tagged With: DEBT, LOANS, STUDENT LOANS

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Comments

  1. Financial Coach Brad says

    October 13, 2016 at 12:30 pm

    Great post Kumiko! Sharing it with our community.

    • kumiko Ehrmantraut says

      October 15, 2016 at 8:33 pm

      Thank you so much!

    • Micheal says

      April 13, 2017 at 10:42 am

      Wow! Great to find a post with such a clear mesegas!

  2. Nikky Bella says

    February 17, 2017 at 11:23 pm

    Nice tips. I work at a bank and rarely see any loan apps to consolidate student loans. Nice tips provided, the reason I likely don’t see many requests for this is college graduates with student loans don’t usually own homes, so they’re not eligible for our lowest form of financing… the Home Equity Lines/Loans

About Kumiko Ehrmantraut

Hello, I'm Kumiko, but everyone just calls me Miko. Welcome to my blog, The Budget Mom. I am an Accredited Financial Counselor® , and mom to a rambunctious 5-year-old boy. Come along with me as I strive to live a life I love on a budget that I can afford. Read more about me.

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