Monday, May 16, 2011

Student Loans: Repayment Options

Even if you've examined your student loan repayment options in the past, it's a good idea to take another look because things have changed.  Recently, in order to encourage people to go into lower-paying jobs and work for non-profits, the Obama administration rolled out a new repayment option and a loan forgiveness program.  There's also a new repayment option that I've mentioned before, because it's the option I'm taking, but the loan forgiveness program is certainly worth looking into.

Because of the tremendous amount of debt that students take on, nevermind the extra money for grad school, many graduates were opting for the highest-paying job they could find, regardless of whether or not it was fulfilling in any way or what they actually wanted to do.  The problem is, we still need teachers and non-profit workers and people who will never make the tons of money necessary to eradicate their debt--hence the Public Service Loan Forgiveness Program.  There are a lot of ins and outs to this program, so go to the link and read through the pdf that explains it, but the gist is that if you work in a public service profession, your student loans are not in default, and you make 120 payments while employed full time by a public service organization, you may qualify to have the rest of your loans forgiven after the 120 payments are made.

There are numerous other loan forgiveness programs as well like Peace Corps and Americorps, military service, forgiveness for law school loans, etc.

For those who do not qualify for loan forgiveness, or even for those who do but need to make the payments until the time when the loan can be forgiven, there are a number of different options to choose from.

Standard Repayment Plan--This is what happens to your loans unless you call your lender and ask for a different repayment plan.   Your lender calculates how much you would have to pay on a monthly basis to pay off your loan in full in ten years.  If your loan debt is low, then this plan will work for you, but I've never met anyone who has stuck with standard repayment.

Extended Repayment Plan-- This extends the period of repayment from ten years to 25.  It's good in that in that it reduces your monthly payment amount; it's bad in that it the longer it takes to pay your loans, the more you pay in interest.

Graduated Repayment Plan-- The graduated plan assumes that you'll start out poor right after graduation and then earn more money over time.  This one starts with a low payment, and then that amount gradually increases.

Income Contingent Repayment-- Income contingent is designed to make repayment easier as well, and works for people with variable income. Each year, this repayment plan looks at the previous years' income, and recalculates your amount owed.  This could work out very well if you have a lean year and then a good year, but be a bit brutal if it's the other way around.  If that's the case, consider switching to...

Income-Based Repayment-- This is another new repayment option, and one that I'm currently taking advantage ofIncome-Based Repayment (IBR) is a repayment plan for the major types of federal student loans that caps your required monthly payment at an amount intended to be affordable based on your income and family size.  Rather than basing your monthly payment on the amount you owe, IBR bases it on the amount you make, which makes a hell of a lot more sense to me.

You can take advantage of IBR for three years, and then you have to call and renegotiate with the lender.  Under IBR, the government also helps you with your interest payments on your subsidized loans meaning that if you take advantage of this program and pay more than then minimum, you can significantly reduce the principle balance on your loans.  There's a handy calculator online that will tell you if you qualify.

Again, and I sound like a broken record, but the most important thing when dealing with you student loans is that you actually deal with them.  You borrowed the money, you're responsible, so you have to step up.  They make it as easy as possible (still sucks, I know) for you to repay your loans and try to maintain a quality of life.  You are not locked into a repayment plan, either, if you run into a situation where you encounter a financial hardship, you can certainly change plans, or defer or forbear your loans.  Whatever you do, do not stop making payments without making arrangements with you lender.

1 comment:

  1. Good outline of the different loan repayment options out there. All I know is that when I'm done paying these suckers off, I'm throwing a major party! (Just one month's payment would get me a pretty sweet bash.)