How to Repay Your Student Loans

Too much debt? Too little income? Find a game plan that works for you.

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."

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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 for details).

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I tried to sign up for the income-contingent plan, but my lender says it isn't available. If you're in the FFEL program, your only income-based choice, for now, is the income-sensitive plan. With this arrangement, you can choose to pay 4% to 25% of your gross monthly income over a certain number of years within the ten-year schedule. You must pay at least enough each month to cover the accruing interest, and you must reapply each year. You can make lower payments in the early years and higher payments later, which results in a higher total debt, or higher payments in the early years to save on interest, for a lower overall debt.

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If you expect your income to remain low indefinitely, you're better off with the income-contingent plan, which does not require that payments cover accruing interest. You can get access to that plan only by consolidating your loans with the Direct Loan program.

Or you could wait until July 2009, when you'll also have the option of the income-based repayment program. This plan uses a formula that identifies borrowers with a high debt-to-income ratio. Those who qualify can make smaller payments -- and keep more of their monthly paycheck -- than in either of the other income-based programs. The feds forgive any remaining debt after 25 years, or after ten if you meet the conditions for public-service forgiveness. See how it works by using the calculator at

Borrowers in both the FFEL and Direct Loan programs will be able to get in on the income-based repayment plan. If you are already repaying, you can switch into it in July.

I have $25,000 in federal loans and $30,000 in private loans. What's the best way to get a handle on them? Consolidating the federal loans gives you the convenience of a single monthly payment -- a benefit to all borrowers -- and lets you stretch the repayment period to as long as 30 years, based on the amount of your debt. Consolidations are also a way to lock in rates on older, variable Staffords. The 2008Ð09 rate -- 4.21% -- is worth nailing down; consolidate during your grace period and you lock in the lower, grace-period rate, now 3.61%.

You can consolidate only your federal loans, but the feds consider all qualified education loans, including the private ones, in calculating the repayment period. For that reason, consolidation has the potential of giving you the longest possible repayment period on the federal loans and the lowest monthly payments. Keep in mind that the longer the repayment period, the more you pay overall.

Consolidating doesn't mean you have to go with a longer schedule, however. Once you've consolidated, you can still choose among the various repayment plans, including the ten-year program.

I still haven't found a job and don't know how I'll be able to make my payments. The federal loan program offers a respite on repayment if you are unemployed, are experiencing economic hardship, have returned to school more than half-time or are on active duty in the military. If you defer based on unemployment or economic hardship, you can postpone repayment one year at a time for up to three years. The interest stops building on subsidized Staffords during that time but accrues on unsubsidized Staffords. If you can, continue paying the interest during the deferment to avoid creating a much bigger debt.

You have to provide documentation to get a deferment for unemployment or in-school status. The feds determine economic hardship based on your income and debt level, not your definition of what feels comfortable. To find out if you qualify, use the economic-hardship calculator at

I'm in over my head on my federal student loans. Help! If you don't qualify for a deferment on your federal loans and you don't see yourself in the other scenarios outlined here, apply for forbearance. Forbearance also puts repayment on hold, in some cases for a year at a time for up to three years, and in others for as long as five years. Interest keeps accruing on both subsidized and unsubsidized loans, making forbearance less advantageous than deferral but better than going into default.

Because the meter keeps ticking on interest, try to get back on track as soon as possible, says Martha Holler, of Sallie Mae, the loan company. "The goal is not to be in forbearance for the maximum amount of time."

Whatever your problem, face it now rather than later, says Gary Carpenter, a certified college financial planner in Syracuse, N.Y. "Lots of kids get into trouble because they don't contact lenders soon enough," says Carpenter. "Once they get into default, lenders won't listen." He says it's better to go to your lenders right away and say, "'Hey, I've got a problem -- I need help.'"

Web Resources for Students

See the Project on Student Debt

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Jane Bennett Clark
Senior Editor, Kiplinger's Personal Finance
The late Jane Bennett Clark, who passed away in March 2017, covered all facets of retirement and wrote a bimonthly column that took a fresh, sometimes provocative look at ways to approach life after a career. She also oversaw the annual Kiplinger rankings for best values in public and private colleges and universities and spearheaded the annual "Best Cities" feature. Clark graduated from Northwestern University.