While taking graduate school classes my own personal student loan debt piled up like a house of cards, and I can assure you this debt made me feel like one gust of wind was going to blow my stack of cards down to the ground. Every month a special little bill from your creditor comes in the mail, and every month it seems like a nightmare trying to figure just how you will pay down those debts on time so that your credit isn't affected poorly.
There is no simple answer to such a question in today's economy. Many new undergraduates are having extreme difficulty finding work, let alone in the field they majored in at college. So the question remains, how do you service this seemingly never ending hunk of debt?
Hopefully, as a graduate you have found some sort of job. If fact, at this point you might take any job which may help you to make those pesky monthly payments back to the government. After all, the Government wanted us all to go to school, get our education, and become economically productive citizens. One problem it the Government hasn't held up their end of the bargain by creating jobs and stimulating the economy with all of the money they printed. No matter what your political belief system is the fact remains if you have this debt you also have an obligation to repay it.
The first step in trying to find some relief for repayment is to determine what type of student loan you actually have. There are several different ways you as a student could have used to finance your college education.
- Federal Family Education Loans (FFEL)- These are most commonly known as Stafford Loans and are made by private lenders that are guaranteed by the federal government. That means, if you default, the lender gets reimbursed by the federal government.
- Federal Direct Loans - These loans are made directly by the federal government to the student.
- School-issued federal loans - If you have school-issued federal student loans (such as Perkins loans), ask your school about repayment options. It's important to note that some schools are willing to work out a more flexible payment schedule based on you having graduated from their institution.
- Private loans. Private loans, made without federal funds, come with fewer repayment options. Contact your lender, loan holder, or loan servicer to find out your repayment options.
Now that you know the types of student loans you may have taken out let's discuss how the hell you can go about repaying them.
Important note: Most Loan arrangements allow you 6 months to find employment before repayments on the loan(s) begin.
Standard Repayment - This is the most common way to repay a student loan. This plan usually outlines a 10 year repayment schedule where you pay fixed monthly installments, and over that 10 year period you pay off the balance of your loan. The benefit to repaying your loans this way is that over that 10 year period you will pay less in interest charges, but the downfall is your monthly payments will be higher than with other methods available to you.
Graduated Repayment - With this method of repayment your early payments toward your loan balance will be proportionately low, and increase over the life of your loan. This bump in loan repayment usually happens every two years, and may be a favorable option if you begin working in a profession where wages initially are low, but will increase quickly.
Extended Repayment - I liken this method to a mortgage. I say this because the person who is repaying the loan will be making payments for up to 25 years. For a newly graduated student to take advantage of this repayment technique the loan amount must be in excess of $30,000. Another unique feature of this repayment option is the ability to combine an extended repayment with the graduated repayment method. The advantage to doing this will lower present payments on your student loan. However, the drawback is an increased cost over the life of the loan.
Repayment Plan for Financial Hardship - This plan is designed specifically if you have graduated and find yourself in a particularly low income, unstable job, or an unusually high level of student loan debt. However, you may still be eligible for this particular plan even if your financial situation is temporary. The catch to being eligible for this type of repayment depends on the type of student loan debt you are currently carrying. For instance in the first three examples of student loans the graduate in question must submit their financial information every year to their lender for approval a privileged repayment plan. When and if requirements are met the lender will adjust payments accordingly.
The first of which is the Income Contingent Repayment Plan (ICRP). A feature of this type of repayment plan is that payments could reach as low as $0 a month. However, with that in mind principal will continue to grow as the lender will not receive payments to decrease already outstanding balances. Quite simply this should be an option of last resort when dealing with your student loan payments as you could potentially gain more debt than you originally incurred.
The second is the Income Sensitive Repayment Plan (ISRP). Different from the first option payments are adjusted off of what you bring home in income, family size, and loan balance. Let's say you land that job at McDonald's you always wanted after graduating with that top ranked business degree from Harvard. Your loan repayments will be based off of annual income (what you earn from flipping burgers), your family size (Your wife and twelve children), and loan balance (the 150k you owe Harvard).
The third option is the Income Based Repayment Plan. You can use this option for both Direct Loans and FFELs. The hitch is that you cannot already be in default on your current student loan(s). The benefit to approaching your loan with this option is increased flexibility compared to the two aforementioned repayment plans. You may pay less in accrued interest and therefore less than the ICRPs and ISRPs.
If you are a former student who has taken out a Perkins loan, payments must be at least $40 a month and the school attended may extend your payments for another 10 years and allow for additional extensions for illness or prolonged unemployment.
If you are planning your financial future and wondering how to best set up a budget, savings plan, and debt repayment system, we can help with helping you with creating a strong financial foundation.
Go to www.oxygenfinancial.net and request Chris Mackey, an expert in this area of financial planning.
Written by:
Chris Mackey, Vice President, Private CFO®
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
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