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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).
POSTED BY: Kit (March 24, 2009 07:12 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 (April 22, 2009 10:56 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 (June 10, 2009 11:37 PM)
I'm invovled in a program that helps young professionals repay student loans by volunteering. Check it out www.sponsorchange.org
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