You’ve Graduated—Now It’s “Payback” Time

It takes four years, on average, to graduate from most colleges and universities. During that time, students can amass some hefty debts. But, for many people, the degree is certainly well worth the burden of accumulated debt. So, these questions remain: How should you repay the debt? And, are there any plans that can help make the “payback” easier?

Today, there are more plans available that offer students flexible payment schedules. If you are applying for a federal student loan now, you can choose a graduated repayment plan that will allow you to make smaller payments upon graduating and larger payments at a later time when you may be earning more money in the working world.

You may also have the choice of an income-contingent repayment plan. This plan calls for you to pay a fixed percentage of your postgraduate income toward your student loan. This percentage could be approximately 5% to 10% of anything above the poverty level of a single person, which is $8,989 according to the U.S. Census Bureau (2003).

A third choice is an extended repayment plan that can lower your monthly payments an estimated 20% to 30% and allow you to stretch out your loan payment schedule from 10 to 15 or even 20 years.

Consolidation Offers Flexibility

There is also good news if you are a student who is already debt-laden. Under the Student Loan Reform Act of 1993, you have the opportunity to consolidate your existing loans with a direct loan from the government. This plan offers you a more flexible repayment schedule while interest rates remain the same.

To be eligible for this plan, you will need to ask your original lender for an “income sensitive” repayment option. This plan adjusts the monthly payments for the loan’s capital, but not the interest, to your annual income. If the original lender will not agree to this option, you may then be eligible for a direct loan from the government.

Two advantages of a direct government loan are as follows: First, the monthly installment payments of principal and interest are contingent upon your income. Because the payments are withdrawn from your wages, there will be less paperwork to muddle through. Second, as your wages increase, the percentage withdrawn from your pay will also rise, allowing you to pay off your loan more quickly and with less accrued interest charges.

If you need to borrow for the current school year, direct loans (and the income-adjusted repayment plan) are also available if you’re attending one of the schools participating in this plan. Parents may also be able to take out a direct loan for as much as the entire cost of their children’s college education. It is hoped that the Department of Education will soon make direct loans available everywhere.

About the Author

This article appears courtesy of Steve Vallender.  Steve is a Registered Representative with Metropolitan Life Insurance Company and MetLife Securities, Inc.  He focuses on meeting the individual insurance and financial services needs of people from Las Vegas, Nevada.  You can reach Steve at the office at (702) 731-0257 ext. 36.

Copyright © 2006 Liberty Publishing, Inc., Beverly, MA, Reprinted with permission. Before implementing any strategy discussed herein, you should consult with your own financial, tax, and/or legal advisors to determine its applicability in light of your own situation.

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