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Stafford Loan Repayment: Your Options for Paying Off Educational Debt

The following is a post from a new contributor, Kristi Ries, who approached me several months ago about writing for this site. Every week, I get dozens of requests for guest posts and contributing writers, and I say no to 99.9% them. What did Kristi do differently? In her email, she clearly and specifically described how she could help me. She identified something that I already knew my blog needed…more quality content on higher education and student debt. Then she showed me she could provide it by sending her resume and on-topic writing samples. Guess what? I gave her a shot. Here’s Kristi’s post explaining Stafford loan repayment options in plain English. Let us know what you think. –David.

Enter Kristi.

Did you graduate from college in the last ten years? If so, chances are good you paid for that diploma with a colorful cocktail of financing options.

(If not, consider yourself lucky. Our generation is dealing with the most inflated higher education costs in history. Between 1982 and 2007, the sticker price of a four-year college degree climbed 439%.)

And if you’re an American with undergraduate student loan debt, at least some of your debt is probably in the form of public, or federal, student loans.

WHAT ARE PUBLIC STUDENT LOANS?

Public student loans are loans offered by the federal government; these include Stafford and Perkins loans. Both options feature fixed interest rates. In this post, we’re going to focus on the most common loan, Stafford loans, which come in two types: subsidized and unsubsidized.

When a Stafford Loan is subsidized, the government pays your interest as long as you’re enrolled as a full-time student and for a six-month grace period following graduation.

When you receive an unsubsidized Stafford loan, the interest clock starts ticking immediately upon disbursement (the date the loan funds were released to pay your academic institution).

Interest on Stafford loans is currently fixed at 6.8%, but some phased-in rate cuts for subsidized loans only might have given you a break. For either type of Stafford loan, you can expect to pay a one percent origination fee (that’s a drop from a high of 4% since 2005).

OPTIONS FOR STAFFORD LOAN REPAYMENT

Remember, Stafford loan repayment begins just six months after you toss your cap and tassel into the air.

If you have more than one Stafford loan, you might consider loan consolidation, which averages your interest rates and combines all of your previously borrowed federal loans into one monthly payment. You can apply for a federal consolidation directly here. (Note that this link only covers federal loans, not private ones. Unfortunately, since the 2008 credit crisis, consolidating private student loans has gotten more difficult. If you’re looking for private consolidation loans, try contacting your existing loan servicer first.)

Generally, you’ll have from 10 to 25 years to repay your loan, depending on which repayment plan you choose.

The Standard Repayment Plan requires you to pay a fixed amount each month based on your principal and interest, totaling no less than $50 or the interest that has accrued.

  • Repayment period: Up to 10 years (120 months).

The Graduated Repayment Plan allows you to make lower payments at the beginning of repayment and every two years, your payments will increase. (Think of it as the professional raise plan; as you move up the career ladder over time, your loan payments also will increase.) Each payment must at least equal the interest accrued on the loan between scheduled payments and can be no less than 50% and no more than 150% of the monthly payment under the Standard Repayment plan.

Initial payments generally cover interest only for the first few years—meaning that you won’t begin beating back the principal loan until after that period.

  • Repayment period: 12 years (144 months) up to 30 years (360 months).

The Income Based Repayment Plan (IBR) bases your monthly payment on your yearly income and your loan amount, known as your debt to income ratio. This plan caps loan payments to make them more affordable based on your income level and family size. (That’s your personal family size – i.e., you + spouse + kids; not you + mom & dad.)

For eligible borrowers, IBR loan payments will be less than 10% of their income—and even smaller for some borrowers with low earnings. IBR will also forgive remaining debt, if any, after 25 years of qualifying payments. As an example, if your initial salary is $35,000 with a household size of one, you can expect a maximum monthly payment of $132.91.

Your reduced payment under IBR may not cover the interest on your loans. If so, the U.S. Government will pay that interest on your Subsidized Stafford Loans for your first three years in IBR. After three years and for other loan types, the interest will be added to the total amount you owe. While your debt may grow if your payments are low enough, anything you still owe after 25 years of qualifying payments will be forgiven.

You can calculate your eligibility for an IBR plan here. If you believe you’re eligible, you’ll need to contact your loan servicer to apply.

  • Repayment period: Up to 25 years (300 months).

The Extended Repayment Plan is for borrowers with federal loans totaling more than $30,000. This plan is similar to the standard plan in that it offers a choice of fixed or graduated payments.

If your entire outstanding loan balance is $7,500 or less, the maximum loan repayment term for which you qualify is 10 years. Let’s say you land on the other end of the spectrum: if your outstanding balance totals $60,000 or more, you’re eligible for the longest repayment plan—30 years.

Keep in mind that stretching out your payments over a longer term will reduce the size of individual payments but ultimately increases the total amount repaid over the lifetime of your loan.

  • Repayment period: 12 years (144 months) up to 30 years (360 years).

You can evaluate what your Stafford loan repayment will look like with this student loan payment calculator.

HOW MUCH SHOULD YOU REPAY?

When you’re just out of school and searching for work (or higher paying work), you may need to choose a repayment plan based upon affordable monthly payments. That’s fine. Focus on getting your budget in line so you can afford your monthly expenses without getting into new debt.

As your income increases, however, you may find yourself with money left over in your budget and wondering if you should start to repay your student loans at a faster clip. Often times, you may be deciding whether to pay down student loans, save for a home, start investing or attempt some combination of all three.

In general, you want to do the following BEFORE accelerating your student loan repayment:

  • Pay off any debt at higher interest rates (usually credit cards).
  • Save a little bit of cash for emergencies.
  • Start contributing a modest amount to a retirement plan.

For more guidance on how to allocate your money as you earn it, read Six (and a Half) Steps to Financial Stability.

Want to share your student loan story? Student debt comes in all shapes and sizes—small balances, big balances, federal loans and private ones. If you’ve got student loans, how are you coping? Are you making progress? Feeling overwhelmed?

Share your student loan story in a comment now »

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Kristi Ries is a freelance writer and editor who also works as the Director of Marketing Communication for a subsidiary of Carnegie Mellon University, a job that’s taking her to Astana, Kazakhstan later this month.

Thanks to rrunaway for the pic.

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Comments

  1. So I am $55k in debt ($20k federal $35k private) and my wife is $15k and $15k. I plan on taking on another $100k over the next four years of medical school but my wife will be working as a nurse earning ~$80k/yr while I’m in school. I hear there is a mandatory deferment period for resident doctors, and I’m wondering how deferment and forbearment factors into these timelines.

    • Hi Mark, I think this may be what you’re looking for:

      “Forbearance is an agreement between the borrower and the holder/servicer of a loan that allows for:

      *A temporary postponement of payments
      *An extension of time for making payments
      *The temporary acceptance of payments that are smaller than required by the repayment schedule

      Typically, borrowers who qualify for forbearance are willing to make payments, but are financially unable to do so.

      The lender is required to grant a mandatory forbearance on Federal Stafford, Federal Grad PLUS, and Federal Consolidation Loans if you satisfy any of the following conditions:

      *You are participating in a medical or dental internship or residency program.

      *Your monthly federal student loan payments are collectively equal to or greater than 20% of your total monthly income (mandatory forbearance available for up to three years).

      *You are serving in a national service position for which you received a national service education award under the National and Community Service Trust Act of 1993.

      *You are eligible for partial repayment of a loan under the Student Loan Repayment Programs administered by the Department of Defense under 10 U.S.C. 2171.

      *You are eligible for loan forgiveness and the associated forbearance under the Teacher Loan Forgiveness Program.”

      Here’s the source: http://www.accessgroup.org/student-loans/student-loan-repayment/deferments-and-forbearance.htm

  2. The best idea is to pay for your schooling with cash. It can be done, I know this first hand. Graduated for a top private school with zero debt no scholarships!

    • well…whoop-dee-doo!!!

    • Would you care to explain how you did instead of just bragging?
      Also, I do believe most people reading this article were unable (not simply unwilling) to pay with cash, since this article is clearly for informing those of us who did have to take on some student loan debt.

    • Why don’t you just ask your parents for money.

  3. MoneyIsTheRoot says:

    @Neil – Yes it can be done…but it’s not very easy, and not everyone has the same opportunities available to them. Student loans are still very much a necessary evil for many…and while they cant be eliminated for everyone, they can be minimized. I wish I could go back and apply some of my knowledge now to who I was prior to grad school!

  4. I’m so glad that Money Under 30 has started to address student loan debt. With over $130k in a mix of federal and private student loans (50k/year undergrad education and now graduate school), the weight of the debt is starting to take over my life, and I’m not even finished with school yet! I was very grateful for Kristi’s explanation of the IBR plan, because it’s relatively new and was unclear to me before. This information provided me with some relief, as I am planning on becoming a librarian after graduate school, and the profession doesn’t exactly pay the big bucks. In the future I will definitely be investigating the IBR option.

  5. I have a principal loan of $1,290.68 which is over $3,000 now I am frustrated and dont know what to do where to go,I’m on a fixed income.

  6. I know it has always been a general rule that paying for education is good debt to take on, but I think we are going to find in the near future that serious consideration needs to be made about going to school period. I went to a private university charging tuition of around 40k. I got help from my parents and some scholarships but still graduated with about 70k in student loans. I graduated, got a good job (60k+) and have been paying down loans for a little less than 2 years now, I have gotten thru about 10k on the loans.

    Now I don’t consider my debt completely overbearing, but I see how the majority of my 20s is going to be dedicated to paying off this cost. But I can’t imagine having started with much more debt than I did. I often look back and wonder if it was all worth it.

    In situations like Alyssa’s above me…130k in debt for school? What profession can justify that cost other than becoming a doctor or lawyer?

    Scary stuff the way our country is churning out young professionals with such mountains of debt with no regulation and just about all facets of the media justifying & promoting the costs as an investment in your future. Several people I know have joined the military since graduating because they cannot afford their loans and cannot find a job…why not just join the military at 18?

    • Maybe you didn’t mean it this way, but I find your comment about Alyssa’s loans very condescending. I could very well ask you what profession justifies 70k in undergraduate loans? Two years of graduate school at your university, and you would be in a very similar situation yourself. I have high loans myself and I am neither a doctor nor a lawyer. It does suck not being to vacation every year or go out to eat with my friends, but it was a sacrafice I chose to make by attending a private college and graduate school. And it landed me in a career I love, so yes indeed, it can be worth it!

  7. Salman Khan says:

    It easy to take loans and spend the money but it’s really hard to pay them back. However Stafford loans are still good for students in times of need.

  8. Like Dan mentioned above, I believe that within a couple of years we will see massive numbers of students defaulting on their student loans. For too long, it’s been very easy for students to enter college, graduate and professional schools and just use federally-backed loans to pay the cost. Since the loans have always been readily available, univerisities are inflating tuition and fees to an unsustainable level. Students will borrow the money no matter the cost.

    People in their 20s (I am included in this demographic!) generally don’t understand the true value of a dollar. To them, $50,000 or $100,000 seem almost equally incomprehensible–they are all large numbers, and it’s easy to say “I have to go into a lot of debt to get this degree anyway, so why not just go to the most expensive private school for only $10,000 more?”

    Unfortunately we are already starting to see in this country that the jobs that are being created are low-wage jobs that don’t pay enough to service loans and live a decent lifestyle. I have a ton of friends who went to law school because it’s the cool thing to do, well now they are up to their eyeballs in debt and can’t find the jobs they were promised.

  9. I think an interesting point that needs to be made about student loans, is that it isn’t always a good idea to consolidate. It seems when you talk to them about it, they push consolidation because it makes it easier for them. I have some undergrad loans at a low interest rate and graduate loans at a higher interest rate (all government loans) and it wouldn’t make sense to consolidate because the payment are all automatically debited and it takes away the ability to make extra payments to the higher interest rate loans. So, mathematically, it saves you money to keep the loans separate if you plan to make any kind of advance payment (think bonuses or simply contributing more when you get raises).

    • Kevin,
      I consolidated my loans because I didn’t want to worry about missing payments because my loans were through different service companies. All of my loans were at about the same interest rate, so it made sense to me. Also, I still have the opportunity to make extra payments toward principle if the opportunity arises (I can;t see that in the near future but perhaps a few years down the road). I can see that you would not want your rates to average out if some were at a much higher interest rate, but my payments are not automatically debited and I can make additional payments or increase the amount of my payment each month if I chose. I do believe it was the right move for me.

      • Haley,

        Surely consolidation is right for some people. I was just commenting because I believe it should not be as automatic as some people think it should be. I’ve had friends that talked about consolidating without giving it much though until I explained how it “could” hurt them (not necessarily that it would hurt them). I just think that it’s a decision that takes a little more critical thinking than some people put into it. The people that I’ve talked to, about half that I explained it to decided to still do the consolidation and half realized that it really didn’t fit their situation as much as they originally thought.

        Another reason I did not do the consolidation, is that it allows me to perform a debt snowball on my student loans. If I pay off one of my loans, my minimum payment on that loan disappears and my total loan payment declines, allowing me to pay even more toward the remaining loans.

  10. I really appreciated this article. I have 48,000 in student loan debt and had 11 separate loans – almost all were at a 6.8 interest rate. I also don’t have a full-time job yet – my husband’s job and my part time work are paying for my loans. We were making payments of $375 and $145 on a monthly basis to two different lenders, and one payment of %145 every three months to a third lender. Consolidating allows us to pay about $310 a month now instead of the $500+ we were paying, which is helpful so that we can pay off higher interest debt first – like my car loan. Consolidating doesn’t make sense for everyone, but it does for me. Thank you for the informative article!

  11. Thanks so much for the article. I would really like to see more on student loan debt. I am a recent graduate with over 100k in student loan (undergrad & law school). I made many sacrifices to live frugally during both (living w/parents, working, ect.). I did not take out extra loan money, but still find myself with a huge amount of debt and a terrible market. I was able to secure a pretty good job, but not one that allows me to even make the minimum on my loans (I’m on IBR). I’ve been on IBR for two years and my overall loan balance has gone up. I’ve considered consolidating, in part to simply make navigating and making payments on my loans more manageable however from what I have read about consolidation and averaging the interest rate, I would end up paying more for my undergrad loans (which are at 3.25 and 5.25). I do not have any other debt, have a small emergency fund, a decent 401k, and have just begin contributing to a Roth IRA.

    I would love to see more articles dealing with student loan debt and the possible options for consolidation and repayment. In the legal field if you’re willing to work 10 years in public service (even though jobs are difficult to get) they federal gov’t will forgive your loan debt (not private) after 10 years, not sure this applies to other fields, but it may be a good option for some.

    I look forward to more articles!

  12. I have a private Sallie Mae loan (4.55%), one subsidized Stafford and one unsubsidized Stafford (both at 6.55%). The loans were originally through Bank of America but were somehow sold to Sallie Mae after I graduated. Now Sallie Mae says I can’t consolidate my loans. Why is that?

    • You may not be able to subsidize all of them through Sallie Mae because of the private loan (I’m just inferring based on what the article says about consolidating private loans: “Unfortunately, since the 2008 credit crisis, consolidating private student loans has gotten more difficult.”) If you want to consolidate the 2 Stafford loans still, I am pretty sure you can do that through Direct Loan Servicing. I only say “pretty sure” because I consolidated my Sallie Mae loans with them but I already had loans through them. I just looked this up on their website about who can consolidate with them “Borrowers who do not have Direct Loans may be eligible for a Direct Consolidation Loan if they include at least one FFEL Loan and have been unable to obtain a Federal Consolidation Loan with a FFEL consolidation lender or have been unable to obtain a Federal Consolidation Loan with income-sensitive repayment terms acceptable to them or intend to apply for loan forgiveness under the Public Service Loan Forgiveness Program. ” I don’t know if this includes you, but I hope the info helps! (see https://loanconsolidation.ed.gov/AppEntry/apply-online/appindex.jsp for more from Direct Loan Servicing)

  13. Christine says:

    One thing to consider for anyone who knows someone or is planning to start college in the next year or two, consider this: community colleges are a *fraction* of the price of most public and private universities. If you can get over the stigma that comes with going to a community college for maybe 2 years, you can save yourself a great deal of money. I transferred to a reputable UC and graduated with less than $12K in debt. It’s incredibly common here in California too. Young Japanese students would attend my community college and transfer into UC Berkeley, definitely saving themselves thousands of dollars by avoiding exorbitant tuition fees for international students.

  14. I have a total of $55K from undergrad and graduate school. I consolidated my undergrad loans the summer I graduated (2004) and got an awesome 2.65% interest rate. After finishing grad school in 2008, interest rates were much higher. My loans were with a commercial bank, rather than with the Dep’t of Ed, so when I consolidated all my graduate loans with the Dep’t of Ed to apply for IBR and get all things lined up for the Public Service Loan Forgiveness Program, I did not consolidate my undergrad loans in with my grad school loans.

    I’m glad you mentioned IBR, but please tell people more about PSLF. It’s really important for those of us who have to borrow big bucks for a graduate degree to go into a field that won’t pay big bucks, like librarians.

    http://ibrinfo.org/what.vp.html#pslf

  15. Anothing thing to note is that if you do have a private loan that a parent/grandparent/family member co-signed for you- take out a small life insurance policy on yourself that will pay off the loans in case you die.

    My friend’s grandmother cosigned $30,000 worth of private graduate loans for her and my friend passed away in a car accident last year. The bank is still requiring the grandmother to pay the loan back. It’s a bad situation on top of losing a family member. A simple $15-$20/month life insurance policy would have fixed everything.

  16. This is a great article – Thanks Kristi!

    • Also, I am interested in the PSLF. I graduated from an MA program with about $40K of debt from stafford and gradPLUS loans. I did my degree internationally and still live abroad. Now, I work for a international charity and am on a standard repayment scheme. Would I still be eligible for the PSLF? I began my repayments after 2007.

      I am also interested in the IBR but am concered that the exchange rate applied to my salary may mean I won’t qualify, even if cost of living consideration would mean I do! Any help is appreciated!
      Thanks.

  17. My husband and I feel very confused about his student loan debt. He has approx $45,000 in debt at a 2% interest rate. Instead of paying it down quickly, we have decided to contribute to retirement, save for our second home, and put as much as we can into savings. Sometimes we feel overwhelmed by the student loan debt, but we also feel as though we need to focus on moving to a bigger home for our growing family. We feel lucky to have the 2% rate, but we wonder if we should get rid of the loan completely before moving to a new home. We don’t have car payments or credit card payments and wonder if we should just focus on moving. Given the housing market, that, of course, makes us nervous as well. David, in our position, would you try to get these loans to a more reasonable amount? I know you have a very small outstanding loan balance and I was wondering if you had paid it down to that point for a reason.

  18. @Julie

    If the 40,000 in student loans is a fixed 2% rate then definitely don’t pay it off. Average inflation rate in the past is probably between 3 and 4% so your 2% rate is AMAZING. Don’t pay it off. And don’t sweat it.

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