Paying Back Your Student Loans Could Be Less Painful Than You Think

Did you graduate from college owing money on your student loans? Many Americans did. In fact, people graduating from college today owe an average of $29,400. If you graduated in 2008 you probably began life after college owing around $23,000. That’s not as bad as owing $29,400 but it’s still quite a burden to shoulder – just when you’re trying to have a career or maybe get married and start a family.

Are You In 10-year Standard Repayment?

When you graduated with student debts you probably were put on a 10-year Standard Repayment Plan. This meant you had 10 years to repay your loans and a fixed monthly payment. For example, if you graduated owing $25,000 and an income of $30,000 your monthly payment – for those 10 years — is probably around $250 a month. That’s $250 a month that wouldn’t be available to help buy a car, save for a down payment on a house or save as a rainy day fund.

There are options

The good news is that if you’re on a 10-year Standard Repayment Plan, you could switch to a different program and get those monthly payments reduced … and probably by a lot.

Here are two other programs that could help.

Extended Repayment – If you were to choose Extended Repayment you would have just that – 25 years to repay your loan(s) rather than 10. However, you would not be eligible for this plan unless you owe $30,000 or more in student loan money and have no outstanding balance on a Direct Loan as of Oct. 7, 1998 or on the date you got a Direct Loan after Oct. 7. The upside of this program is that you will have lower monthly payments then with either Standard or Graduated Repayment.

Graduated Repayment – With this plan your payments will start lower than those under Standard Repayment but then grow every two years. This could be a great choice if you’re in a career where you expect your income to steadily increase over the next six, seven or 10 years.

Programs that could take some of the pain out of repayment

A program that has been gaining in popularity over the past few years is called Income-Contingent Repayment. As you could guess from its name, this program takes your income into account when calculating your monthly payments.

There are four income-contingent programs.

• Pay As Your Earn Repayment
• Income-based Repayment
• Income-contingent Repayment
• Income-sensitive Repayment

Pay As You Earn

This program has been in the news recently as President Obama just signed an executive order that reduces the cap on student loan payments under this program to 10% (from 15%) of your discretionary income. This program also takes into consideration your family size. It also includes student loan forgiveness – that if you make all your student loan payments and on time for 25 years, your remaining balance(s) will be forgiven. You could get those debts forgiven in just 10 years if you work …

• In law enforcement
• For a non-profit
• In public service
• In the armed forces
• Are a teacher
• Practicing medicine in certain communities
• As a firefighter

However, there is a downside to Pay As You Earn. You will be required to submit to your loan servicer documentation proving your income every year. If you fail to do this you will automatically be dropped back into Standard Repayment and your monthly payments could increase dramatically.

Income-based Repayment

This program also takes into consideration your income and family size. To qualify for it you would need to have a partial financial hardship. This means your monthly payments under it would need to be lower than under 10-year Standard Repayment. While you would have lower monthly payments under this program, you would end up paying more interest than under Standard Repayment. However, it also includes loan forgiveness, as any balance(s) you have remaining after making the equivalent of 25 years of qualifying monthly payments would be forgiven.

Income-Contingent Repayment

If you cannot qualify for Pay As You Earn or Income-Based Repayment, you should be able to switch to this program. It is based on your AGI (Adjusted Gross Income), your family size, the amount of your Direct Loans and …
What you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that changes with your annual income or

1. 20 percent of your monthly discretionary income
2. The loans that are eligible under this program are:

• Direct Unsubsidized Loans
• Direct Subsidized Loans
• Direct Consolidation Loans (except Direct PLUS Consolidation Loans)
• Direct PLUS Loans made to graduate or professional students

Income-Sensitive Repayment

A third option under the umbrella of Income-Contingent Repayment is Income-Sensitive Repayment. If you still have an FFEL loan(s) and are having a problem making your payments, this program could be for you. With this option, your payments would increase or decrease depending on your annual income. You would make payments for up to 10 years, which would be pegged to a set percentage of your gross monthly income – generally between 4% and 25%. Loans that are eligible for Income-Sensitive repayment include:

• Subsidized Federal Stafford Loans
• Unsubsidized Federal Stafford Loans
• FFEL PLUS Loans
• FFEL Consolidation Loans

Here, courtesy of National Debt Relief is a brief video explaining the biggest pros and cons of income-based repayment.

Consolidating your loans

If you’re like most people with student loans you probably have a number of them and from different lenders. In fact, there was one study done recently that found the average college graduate with student loans has 16. If you have just 10 loans from 10 different lenders we don’t have to tell you how difficult it can be to keep track of 10 payment dates and to make 10 different payments. If this is your situation you might want to get a Direct Consolidation Loan and pay them all off. That way you would have just one payment to make a month and a fixed interest rate. The loans would all have to be federal loans. You could have a lower monthly payment because you would have longer terms – or more years to repay the loan. However, to be eligible you must have at least one Direct Loan or one Program loan that’s in a grace period or in repayment.

The downside to a Direct Consolidation Loan is that you end up paying more interest. In addition, you would lose the benefits that came with your original loans such as discounts, principal rebates, deferment, forbearance and the like.

How interest is calculated on a Direct Consolidation Loan

Assuming that you consolidate several different loans into a Direct Consolidation Loan, here’s how you would calculate the interest. It would be the weighted average of the interest rates of the loans you’re consolidating rounded up to the nearest 1/8th of a percent. As an example of this, if you were consolidating a $5000 Perkins loan at 5% and an Unsubsidized Stafford Loan for $10,000 at 6.8%, your weighted average would be 6.2%. When you round this up to the nearest 1/8th of a percent, it would be a total interest rate of 6.25%. To put this another way, your new interest would be higher than the lowest interest rate you are now paying but lower than your highest interest rate.

How to get a Direct Consolidation Loan or switch to a new repayment program

If you decide your best option would be to get a Direct Consolidation Loan, you can actually do this online. All you would need to do is go to the site StudentLoans.gov. You could then apply for your loan either electronically or on paper. If you choose to apply electronically, you could complete the application right on this site.

Do feel your best choice would be to get a new repayment program? In this case you will need to contact your loan servicer. If you don’t know your loan servicer, go to the National Student Loan Data System (https://www.nslds.ed.gov/). It will have information on all of your federal loans including the loan type, the original amount, the amount that was dispersed and the loan holder or servicer. However, private loans are not included in the NSLDS so you would have to track down this information yourself.