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.
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).
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.
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?
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.