Student Loan Debt is Inescapable, but Repayment is Quite Flexible

As a planner, I’ve been surprised by the number of people with student loans who aren’t aware of the fact that there are multiple types of repayment plans available with federally-backed loans. Private loans, by contrast, do not provide much flexibility but may offer lower interest rates these days.

Most graduates are automatically placed into a standard 10-year repayment plan, which begins after a 6-month grace period following graduation. In most cases, paying loans off under this plan results in the lowest amount of total interest paid (simply because the loan is paid off in the shortest period of time). But, depending on what you do professionally, other repayment plans might make sense. The main repayment plans are:

• Standard (10-years with a constant monthly payment)
• Graduated (monthly payments that start out smaller and steadily increase)
• Extended (spreads out payment over 25 years)
• Income-based and income-contingent plans (monthly payments are capped based on your income, and if you can’t pay off your loans within 25 years, they are generally forgiven).

For calculators and more information, this is the most important site.

You can also choose to pay off your loans much more aggressively and finish sooner, and most newer loans don’t have penalties for doing so. This saves significantly on the total amount of interest you’ll pay.  However, as a planner, I sometimes caution people about doing this. It’s not that I don’t like paying off debt (in fact, I LOVE it!).  But, rather, putting so much money toward student loans may make it more difficult to achieve other goals (like home ownership) that require a pile of cash that’s a challenge to accrue.

Student loans will follow you everywhere, and generally cannot be discharged in bankruptcy. This often surprises people, so I tell them to think about their brain as the collateral asset. This  has limited resale value when removed from your skull.

In certain cases you can stave off monthly payments. Service programs like the Peace Corps, unemployment, and financial hardship may qualify you for a deferment (in which the government pays your interest on subsidized – but not unsubsidized – loans) or forbearance (where interest accrues and adds to your principal regardless of loan type).

Future newsletters and blog entries will elaborate further on student loans. We just finished a month-long student loan modification drive with our Members, in response to a special consolidation program. 

This blog entry is part of our June newsletter offering advice to recent graduates. 

Bill Varettoni is a financial planner and the founder of Community Ladders.