If you're on the ball, you can find a repayment strategy that works well for you.
More than half of all college graduates have student loans to repay. For most, it's probably their first big, long-term debt. So if the lingering cost of your education is causes a little bit of panic, it's not surprising.
Adjusting to the fact that you have thousands of dollars to pay back when you've just started a career can seem like an impossible burden. Fortunately, it's not. There are a variety of ways to structure repayments that can make student loans easier on the nerves as well as the pocketbook.
REPAYING FEDERAL LOANS
There are several ways to repay federally insured
Stafford loans. Each one fits a slightly different financial situation, so you need to think seriously about what you can afford when you pick a repayment plan.
Remember that the best plan for you isn't necessarily the one with the lowest monthly payments — or the one with the highest payments and the shortest term, for that matter. Think about what you can afford now, and what you can reasonably expect to pay down the road. You'll find there are slight differences in the longer-term repayment options, depending on whether yours is a Direct Loan or a federally insured loan (FFEL) from a private lender.
And you're not making an irrevocable decision. You can always switch plans if you need or want to.
The
standard repayment plan requires you to make fixed payments for a set period of time. The time repayment takes depends on how much you've borrowed, but it won't be more than ten years. This plan will probably let you pay back your loan quickest, and cost you the least overall, provided you have the money to keep up with the payments.
If you're not making a lot of money right now, but you're expecting to have a higher income in the future, the
graduated repayment plan may be the best plan for you. Your payments are due over a fixed period of up to ten years. Your payments start out small and increase, generally every two years.
The
extended repayment plan requires fixed or graduated payments over a term that lasts up to 25 years. You must owe more than $30,000 in either FFEL or Direct Loans to qualify for this plan. While your payments are lower than with a standard or graduated plan, this method will cost you more overall because you are paying interest for a longer time.
With
income-sensitive repayment, your monthly payment is capped at an amount considered affordable. Balances remaining after 25 years can be cancelled. If you work in a qualifying public service job for ten years, the balance can also be cancelled. NO income tax is due on cancelled amounts.
The
income-contingent repayment plan, which applies to federal Direct Loans, sets your monthly payments based on your income, which can give you some security if you have a volatile cash flow. What you pay each year rises or falls based on what you make, and there's no set minimum payment. You can take up to 25 years to repay under this plan. After that, any amount that's still unpaid will be forgiven, or cancelled, by the government, although you may have to pay income taxes on the amount that's forgiven. Graduate and professional school borrowers may use this plan as well.
The
income-based repayment plan, which was inaugurated in July 2009, bases your monthly repayment amount on your income and limits what you must pay to 15% of the difference between your gross income and 150% of the federal poverty guidelines. After you make payments for 25 years, the remaining balance is forgiven. This plan is designed to work with a program that began in 2007 that forgives your loans if you work in a broadly defined public interest job. In that case, if you make payments for ten years, the balance is forgiven at that point. To participate, though, you must move any loans you took through FFEL to the Direct Loan program.
You have ten years to pay off a Perkins loan, and make the payments to your school or the agent it selects. There are no repayment options. The amount you owe each month, which must be at least $40, is based on the total amount you owe.
HOLD ONTO THAT DEBT!
If you're not used to having debt, you might find yourself wanting to pay off your student loan as quickly as possible. But as crazy as it seems, it can actually be a good idea to pay off your debt on a longer-term schedule.
That's because for many people, some of the interest charges are tax deductible. So even if you've got extra cash you could use to repay the loans faster, it may make better sense to put the money into savings and investments instead. That's especially true of money you put into a tax-deferred savings plan, such as an IRA or 401(k). Check IRS Publication 970, "Tax Benefits for Education," about the amount of income you can have and still deduct interest. You should also talk with your tax adviser about your particular situation.
DEFERMENT, FORBEARANCE, AND DISCHARGE
If something happens that makes it hard for you to pay back your student loans, you may be able to postpone payment for a set period of time. You can apply to
defer your loans, for example, if you're in school at least half time, if you take a parental leave from work, or if you enter a public service organization, such as the armed forces or the Peace Corps. Unemployment, temporary disability, and other events that may keep you from earning money can also make you eligible for deferment. If your loans are deferred, your payment schedule is halted, and the balance doesn't accumulate interest.
If you don't have a valid reason for deferment but you still can't pay your loans, you can request a
forbearance. If a forbearance is granted, you won't have to make payments, but your loans will continue to accumulate interest.
In certain very special cases, it's possible to have your loans
discharged, or cancelled altogether. This usually requires an extreme circumstance, such as total disability. The government sometimes also discharges loans as a reward for working full-time in particular positions with the disabled or low-income families, or in law enforcement, teaching, or other public service areas.
KEEPING UP ONLINE
If you want to get the latest information about your direct Stafford loans, from finding out the current interest rate to calculating total costs, you'll find useful resources at
www.federalstudentaid.ed.gov or call 800-848-0979. If you have a FFEL from a private lender you can contact the lender to speak with someone directly or visit the lender's website.
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