Managing Student Loan Debt

In this topic, we cover:

• Loan repayment options for federal student loans.
• How repayment options affect monthly payments.
• How lower monthly payments equal higher overall cost.

There are more repayment options than ever for repaying federal student loans. So no matter your income, you should be able to keep your education debt in good standing – IF you take the time to learn about your options and apply them to your personal situation.

After leaving school, you will enter a grace period. During this time, typically six months, you are not required to make payments on your student loans but interest is growing on the loans – so start paying if you can.

When you begin to repay your loans, you can send monthly checks to the servicer of your loan or you can set up an automatic bank draft, so your payment is deducted from your bank account each month. Bank drafts reduce the chances of a missed payment, which can mean additional fees and higher interest rates. There are often interest rate reductions when paying by automatic draft, so you could also save money.

Monthly Payment Plans
Federal student loan repayment plans offer options that balance affordable payments with the overall cost of paying off the loan. As a general rule, lower payments and longer repayment periods increase your overall cost since interest grows over a longer period of time. The major federal repayment plans are:

• Standard Repayment – The monthly payment is the same over a repayment term of ten years. This is the least expensive option overall, but the monthly payments are typically higher than other plans.

• Graduated Repayment - This schedule begins with a lower monthly payment than the Standard plan and then increases the monthly payment every two years over ten years. The big idea is that your salary will gradually increase to help you handle higher payments in the future.

• Extended Repayment - If your loan balance (including any interest accrued while in school) is over $30,000, you may qualify for a repayment term of up to 25 years. While the monthly payments may be lowest, this option is likely to be the most expensive overall because the loan interest has more time to grow.

• Income-Based Repayment – If you have a demonstrated financial hardship, meaning you are having a hard time meeting basic living expenses because of student loan payments, this option will cap your payment amount at between 10 and 15 percent of your discretionary income (depending on when you borrowed). The government uses your income, family size, location, and federal poverty guidelines to determine your eligibility. After 20 or 25 years (depending on when you borrowed), any remaining loan balance is forgiven, but you may have to pay taxes on the forgiven amount.

• Pay as You Earn Repayment – This plan caps your payment at generally 10% of your discretionary income based on the same guidelines as the Income-Based plan and forgives any remaining balance after 20 years. Like the Income-Based plan, any forgiven amounts may be taxed. Your payments will never be higher that the Standard plan.

• Revised Pay as You Earn Repayment – This plan is like the Pay as You Earn plan, but 1) offers more generous benefits if you received subsided loans, 2) does not limit your potential maximum monthly payment to the Standard plan, and 3) has less generous interest capitalization provisions in the event you eventually earn too much for the plan.

• Income-Contingent Repayment – Your monthly payments are calculated a year at a time, based on your actual income, family size, and loan amount and forgives any outstanding balance after 25 years. Any forgiven balance may be taxed.

• Income-Sensitive Repayment – Only for older loans disbursed under the Stafford, FFEL PLUS, and FFEL Consolidation programs, the monthly payments are calculated a year at a time, based on your income, family size, and loan amount. Payment is completed over 15 years.

Any plan other than the Standard plan will be more expensive overall, but your monthly payment will likely be lower. While the monthly payments may be lower, interest accrues over a longer period of time. Longer repayment schedules can triple the amount of interest you pay and the overall cost of your loan. For example, an education loan balance of just over $30,000 would result total payments of $41,430 under the 10-year Standard plan at 6.8% interest – a cost of just over $11,400. Under the 25-year Extended Graduated plan, the same loan balance would result in payments up to $67,653 – a cost of over $37,600.

But there is an exception to the lower payment equals higher overall cost rule - if you participate in the Public Service Loan Forgiveness program and the amount forgiven makes up for a decade of extra payments. Please review our Public Service Loan Forgiveness material for details.

To estimate your potential federal loan payment under a variety of plans, use the Federal Student Aid Repayment Estimator.

If you have alternative or private loans, your repayment schedule will likely be most similar to the "Standard Repayment Schedule,” but you should contact your lender to understand all of your options.

Other Considerations for Repayment
Student loan repayment is a serious commitment with serious consequences for non-payment. If a payment is missed, you could damage your credit report for up to seven years and even reduce your credit score. So pay close attention to due dates and consider setting up automated bank draft payments.

If you’re having trouble making your monthly payment, there will often be options to help you reduce your payment. With federal loans, you can change your repayment plan at any time.

And remember, you can pay off any federal student loan early, potentially saving thousands of dollars in interest!

Library The Concept of Professionalism