So, you graduated college. Congratulations! Time to go to work and start paying back the man for that valuable brain you now have. If you graduated this year, then you’re probably approaching the end of your grace period to start paying back student loans you may have. We discussed Budgeting After College in a previous post, and student loan repayment is going to be a big part of your budget for a while. Okay, longer than a while.
Types of Student Loans
I’m not going to go too in-depth about the types of loans. If you’re reading this then you probably already know what’s out there, or at least what you have.
Federal Loans: Also called Federal Direct Loans. One of the first things college applicants do is fill out a FAFSA (Free Application for Federal Student Aid) to find out how much money the government will lend them. Two types of loans are offered, Stafford and Perkins. These loans can be subsidized so interest does not accrue while you are in school at least half-time. There are limits to the amount that can be borrowed and subsidized, and interest rates are fixed.
PLUS Loans: PLUS loans are federal loans offered to parents of students and graduate students. The interest rates are higher than direct loans. Payment can be deferred while the student is enrolled at least half-time, and interest will not accrue until payment begins.
Private Loans: Private lenders such as Sallie Mae offer student loans. They differ from federal loans in that the interest rate can be adjustable and your credit history will affect the amount and the terms, much like a personal loan.
Other: Some states and institutions may have their own loan programs.
Repayment Options for Student Loans
Standard Repayment: Fixed monthly payments over 10 years. This is the shortest repayment term option but, if consolidated, it can be drawn out up to 30 years. This option has the lowest total interest. If you have no other debts and you can afford the payments, this is the best option for you. If you’re able to afford more than the minimum payment, then do so. This will shorten the length of repayment, and save you money on interest. The quicker you can pay it back, the better.
Graduated Repayment: This is similar to the standard repayment, only your monthly payments will vary over time. They will start out low, but will have to at least cover the monthly interest. The payment amount will increase every 2 years. This option is good if you have a low income after graduation (paper route) but plan to get a higher-paying job in the future (game show host). Hey, it could happen.
Extended Repayment: If you have over $30,000 in student loan debt, you can extend your repayment plan to 25 years, with the same terms as either standard or graduated repayment plans. If you can’t make the payments over a short period, this is the better option. However, be aware that this will result in more interest paid, increasing the overall cost of the loan. As I said before, the quicker the better, but not everyone can do quicker.
Income Based Repayment: This plan takes into account your income and family size to determine what payment you can afford. It also extends repayment up to 25 years. This option is not offered to everyone. If you would owe less under this plan than a standard plan, then this is available to you. This would be calculated by the department of education. If you’re supporting a family with a low-income job, look into this.
Income Contingent Repayment: This plan is based on your income (like the income-based plan) but it’s recalculated every year and it’s available to anyone. Unlike Income Based Repayment, this plan requires you to pay interest on previously accrued interest. Income Based Repayment is probably a better option, and if you don’t qualify for that, then the Income Contingent plan isn’t your only option.
Another feature of the loan repayment plans to consider is forgiveness. This is the amount that the government will “forgive” after a certain period of time. Meaning you will not have to pay it back. Each option has a different policy. Forgiveness is typically are offered to those who enter education and public service industries.
Standard: If you teach for 5 years in a low-income elementary or secondary school, up to $17,500 is forgiven. If you’re in a full-time public service position, your remaining balance after 120 payments is forgiven.
Graduated: Same as standard, only without the deal for public service workers.
Extended: Same as standard.
Income Based: Same as standard, plus any remaining balance after 25 years is forgiven.
Income Contingent: Same as standard, but any remaining balance after 25 years is discharged. This is different than if it was forgiven. You won’t have to pay it back, but you will owe income taxes on the discharged amount.
Each plan offers benefits for different people/situations. Clearly, student loan forgiveness is offered only to those who become teachers or public service workers, but that doesn’t mean hope is lost for all you entrepreneurs, graphic designers, journalists, and whoever else.
This is such a broad topic that I don’t want to try to cover too much in one post. If there’s something specific about student loan repayment that you’d like to hear about, mention it in the comments and we’ll see about digging up some more info for you.
For more general information on student loans and student loan repayment, check out http://studentaid.ed.gov