Paying for College
How to Repay Student Loans
Too much debt? Too little income? Find a game plan that works for you.
By Jane Bennett Clark, Senior Associate Editor
From Kiplinger's Personal Finance magazine, February 2009
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You got through college with straight A's, but now you face your first big test as a young adult: squaring a starting salary with the payments on your student loans.
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That's a pressing issue for June grads as their six-month grace period on student-loan repayment ends. The challenge is especially great for borrowers whose debt includes private loans. Whereas federal loans -- including Staffords as well as Grad PLUS loans -- generally carry a fixed interest rate (Staffords issued before July 2006 have variable rates) and flexible repayment terms, private loans usually have variable rates and less-forgiving repayment policies. You could end up paying far more than you expected, with no relief in sight.
Best strategy? Figure out a way to make the federal loans manageable, then throw every spare nickel at the private loans (assuming the lender allows you to prepay), says Edie Irons, of the Project on Student Debt. "Because there are fewer protections, it should be a priority to try to pay off private loans first."
Luckily, you have plenty of choices on the federal-loan side, whether your loan comes from a private lender who participates in the Federal Family Education Loan (FFEL) program or from the government's Federal Direct Loan program.
I have Stafford loans and want to repay them as painlessly as possible. Which plan should I choose? You're automatically enrolled in the standard repayment plan unless you say otherwise. Stick with this plan, under which you make 120 equal monthly payments over a ten-year period. Be sure to take advantage of any discounts, such as 0.25% off the interest rate for having payments deducted automatically. If you want to unload your loans on a faster timetable and save on interest, pay a bit more than the allotted amount each month. Be sure to specify in writing that you want the extra amount to be applied to the principal.
My salary is low now, but I expect it to jump in the next few years. The graduated repayment plan suits your situation. Monthly payments start low and rise in increments over the ten-year period. Because you pay less in the early years, you pay a bit more in interest over the life of the loan than you would with the standard plan.
Say you have a total of $25,000 in Stafford loans, each with a 6.8% interest rate. With a standard repayment plan, you'd pay $288 in 120 monthly payments, for a total of $34,524. With a graduated plan, you could pay $142 a month for the first three years and $375 a month for the remaining seven. Your total payments would add up to $36,590.
I have $40,000 in Stafford loan debt and can't afford the monthly payments. The extended repayment plan applies to borrowers who owe more than $30,000 on their federal loans. The plan lets you stretch the payments as long as 25 years, lowering the monthly amount but increasing the cost of the loan. On $40,000, you would pay $227 a month for 25 years, for a total of $83,289.
I'm a freelance writer. I don't expect to earn enough to make my payments affordable anytime soon. If you're in the Federal Direct Loan program, look into the income-contingent plan, which calculates monthly payments according to your income, family size and the total amount of your loans. You get up to 25 years to repay the debt, after which the feds forgive the remainder.
Thanks to recent legislation, borrowers who work in the public sector -- say, as a firefighter, teacher or government employee -- and who make 120 payments after July 2008 in this or the standard plan qualify for loan forgiveness after ten years. The income-contingent plan is available only to borrowers in the Direct Loan program, which you can switch into by consolidating your loans in that program (go to www.loanconsolidation.ed.gov for details).
Reader Comments (16)
Posted by: Dom at 12/24/2008 09:35:38 AM
Where can I find more information on student loan forgiveness for government employees who make 120 payments? Thanks!
Posted by: Clark G at 12/25/2008 02:34:55 AM
It is interesting to me that whenever these financial sites talk about student loans, they leave out most of the meat and potato information pertaining to private loans. Like after you have consolidated to private, you no longer can write off the loan interest because it's private. And then there is the interest rates, which currently are at least 10% and VARIBLE. So anyone that is thinking of "Making their life easier" and consolidating all those loans to one, think twice....and shop around...then think about it again. Good luck!
Posted by: Phil at 12/27/2008 10:12:57 AM
I'm wondering how much student loan debt there is in this country. 10 billion? 20 billion? Or am I way off.? Anyway, it seems ridiculous to me that we are bailing out the financial sector for over 700 billion, the auto industry for many millions and I'm strapped with 250K in student loans that I will be paying off for the rest of my life just to have had the right to an education. I make decent money now, but my 250K in student loan debt makes it impossible to save for retirement, travel or enjoy the fruits of my 12+ years in college. And, my incredible tax bill is going to save the ass of people who have been dishonest.
Posted by: Ashley at 12/29/2008 12:57:46 PM
I have a hard time understanding why taxpayers should "bail out" people who took out large student loans they now resent having to repay. If these students didn't want to be "strapped with $250k in student loans" they should have attended a less expensive university, worked a second job to get through school, or saved more money between undergraduate & graduate school so that fewer student loans would be necessary. As a taxpayer, I too think the bailout of the financial sector - and now the auto industry - is a colossal waste of taxpayer money. But a bailout of student loan borrowers would be just as big a waste. No one forced you to sign those promissory notes --- your debts are yours to repay.
Posted by: Marilyn at 12/30/2008 02:20:18 AM
To answer Ashley's comment: I understand your opinion, but you are referring to a very small population of people who are living in your perfect world, lets be real, Life's not that easy for things to fall into place like we need them to, especially when you are in school and all finances are eating you alive.. To quit school is not an option, and you better believe I did every thing in my power to keep from borrowing, but as a single mother I had to survive, and student loans were the only option I had. The GOV. needs to help regulate and reach out to more people who are trying to help themselves, insted of feeding us to the hungry wolves of banking lenders...thats what is not fair....
Posted by: Steve at 12/30/2008 07:36:27 PM
A little known fact, not of much use to most of you but tell others: If you get all your loans from one vendor (usually the state vendor via the college financial aid office) you are stuck with that one vendor for life. You cannot re-fi with any other. Get one semester or year loan with a second vendor. Go to almost any bank. Now that you have two vendors you can refi with anyone. Example: 50k in loans. Two people. same college, same course, same borrowed amount, same terms. (I married the second but we got divorced years later). My loans include one year from a second vendor. Though I suggested she do the same she did not. Outcome: My loan rate is 1.625% (read it and weep) My current payment is $161/month. Her current payment is $700+ per month at ~7%+. Monstrous difference. The ability to refi to such a low rate: 3.125% - 1% for pay 24 pmts on time, - 1/4% for auto payments, may not occur again, (it did in 2002) but if you know a student who does not have two vendors, the difference can still be enormous.
Posted by: Nicky at 12/31/2008 11:44:39 AM
The real problem with student loans is the interest accrued while the student is in school. The goverment should make that illegal. A student can borrow 15,000 but could owe 25,000 due to the interest that is allowed to accrue while the student is in school. Most college students can't afford to make interest payment while they are in school.
Posted by: Ben at 12/31/2008 04:26:29 PM
Dear Steve, good luck refinancing in the current economy. There is simply no one out there who will refinance private student loans right now.
Posted by: Trisha Adams at 01/04/2009 02:51:21 AM
I'd like to get some advice on figuring out what kind of loans we have and whether I can refinance them, etc. Are there any counselors out there? Should we call Sallie Mae? (The people who hold the loan are no help at all.)
Posted by: Aaron Weber at 01/07/2009 10:48:37 AM
Trisha: You can find the status and type of all federally-guaranteed loans through the Department of Education website at: nslds.ed.gov For private loans, try checking your credit report at annualcreditreport.com - that will show all the people you've borrowed money from, and then some. Depending on your loan (FFEL vs. Direct), you may also have a loan guarantor, who can help you with questions you may have.
Posted by: Kevin at 01/13/2009 08:56:13 AM
I am nearing the end of my grace period for my grad school loans, which are a mix of federal and private. Are there any programs out there that will allow me to consolidate all of them and possibly lower my total monthly payment? It's going to be tough paying these unless I can lower the payment somehow.
Posted by: Amanda at 03/13/2009 11:08:14 AM
Has anyone else had problems with Sallie Mae? My loans are coming due and their online info is great, but apparently their call center is in India now and I get so frustrated because I can barely understand the other person and I don't think they even know what they're telling me, I already found out one lady told me the wrong info. I have several loans that are too high for me to pay, so I'm doing my best to work things out now.
Posted by: Kit at 03/24/2009 07:12:03 PM
This column was reassuring - if you are a young adult starting out. I am a midlife career-changer who went to grad school on student loans. Now, I face $1245 monthly repayments when my income is just under $30K annually. I hope to make more, as I am an online professor at two universities, but in 25 years, I will be 81! As an online professor, would I be eligible for the public service forbearance?
Posted by: Michael at 04/22/2009 10:56:02 AM
This article is misleading. Unfortunately, the real world is not so black and white in terms of options. Also, it has been my experience that contacting the student loan companies directly does not help. They always want all or nothing in terms of payments, and are more interested in getting your money rather than helping you to manage your loans. What kind of help is 'Can't you borrow it from your family?' - that is no help at all. The entire student loan system has been allowed to balloon out of control. Schools raise tuition rates to exorbitant amounts, student loan companies allow you to borrow beyond your means, and in the end, if you are unwilling or unable to pay, the government backs their greed, and in the end your credit is ruined for the rest of your life. Trust me, I have been through all this, and if you find out after you graduate you cannot afford to pay on your loans, no one will be there to help you out, and they will never go away. As smart as I am, I would have thought I could have planned for this, or even seen it coming as I was going through school. However, the true amount of your loans are so scattered by tiny loans here and there, and you never see an overall bill of your debt, it sneaks up on you. This entire system needs reform!
Posted by: Agyeman at 06/10/2009 11:37:37 PM
I'm invovled in a program that helps young professionals repay student loans by volunteering. Check it out www.sponsorchange.org
Posted by: chris at 08/14/2009 04:25:27 PM
sponsorchange.org is only in Pittsburgh and doesn't even tell you how much they will pay back. Kind of useless.