January 16, 2014
Repayment strategies for your student loans
The party is over for the class of 2013.
Students graduating from college enjoy a six-month grace period before they have to start repaying their loans. But for the latest crop of graduates, that period is now over, and those who have loans are figuring out how to pay them off.
The good news is that these recent graduates have several repayment options. The bad news is that they have a lot to pay: The average amount a 2012 graduate with loans owed at graduation was $29,400, according to the Project on Student Debt, an initiative of the Institute for College Access and Success. How successfully they manage the process can affect their readiness to move on with key financial stages of life, from buying a car to taking out a mortgage and even getting married.
"Every dollar of additional student debt is a dollar less that you have available for other priorities," said Mark Kantrowitz, senior vice president and publisher of Edvisors.com, which publishes websites focused on planning and paying for college.
The magnitude of student loans outstanding is staggering. Some 70 percent of the college students who graduated in 2012 from nonprofit schools were carrying student loan debt, according to the Project on Student Debt. In aggregate, students owe an estimated $1.2 trillion on their loans, according to the Consumer Financial Protection Bureau, making student loans the largest form of consumer debt other than mortgages.
(Read more: Student loans fuel $12.3 billion rise in consumer borrowing)
Borrower's options for repaying student loans vary depending on the lender. The terms of private loans are not uniform, but Rohit Chopra of the Consumer Financial Protection Bureau said recently in a blog post that "we've received thousands of complaints from private student loan borrowers. The most common complaint comes from those who are unable to negotiate a repayment plan that they can actually afford." The bureau has also found that private loan servicers don't always act in borrowers' best interests when they are repaying loans.
Government loans offer a number of repayment options, outlined on government websites like studentaid.ed.gov. The standard option is straight repayment, which will extinguish borrowers' debt in 10 years if the amount they owe at graduation is less than their starting salary after college.
If that seems too onerous—for example, if a borrower has landed a low paying job, or is living in an extremely high cost area—he or she can opt into some form of an income based repayment plan. Those plans extend payment time by reducing monthly payments, but there is a catch: Because the loans are outstanding longer, the interest the borrower owes gets higher. Kantrowitz estimates that a student with a loan at 6.8 percent interest who extends the term from 10 years to 20 would cut monthly payments by a third, but ultimately pay more than twice as much in interest.
Another option is graduated repayment, where the initial loan payments are smaller than those later on, and the loan being paid off in 10 years. This is a useful option for someone who has a low starting salary but expects it to increase quickly.
A borrower who has more than $30,000 in debt can opt for extended repayment and take up to 25 years to pay. But as with the income-based repayment plan, taking longer to pay off the loan means greater total interest payments over the life of the loan.
Some borrowers in duress opt for forbearance, especially if they can't qualify for a simple deferment of their loan payments. But neither of these options is exactly a repayment plan. A deferment may mean that the lender may pay the interest on your loan, so your balance won't balloon when you resume payments. In forbearance, though, the interest keeps piling up.
"Forbearance is a very costly way to try and manage debt," said Lauren Asher, president of the Institute for College Access and Success.
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