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 percent.)
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 makes federal student loans different?
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).
The interest rates on new Federal Stafford Loans originated in 2014-2015 are:
- 4.66 percent for undergraduate students
- 6.21 percent for graduate and professional students
Your actual rate will depend on when you took out the loan.
Your Stafford loan repayment options
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 federal consolidation, which averages your interest rates and combines all of your previously borrowed federal loans into one monthly payment.
Whether you consolidate or not, you’ll have from 10 to 25 years to repay your loan, depending on which repayment plan you choose. Let’s break down your options:
STANDARD REPAYMENT PLAN
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)
GRADUATED REPAYMENT PLAN
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 percent and no more than 150 percent 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)
INCOME-BASED REPAYMENT PLAN
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)
EXTENDED REPAYMENT PLAN
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