Planning and Managing Student Loan Debt Repayments Part-1

This series of articles is not about how you should take a student loan, or how much you should take, or whether you should use a student loan to pay your tuitions or to fund your lifestyle. We are assuming that you already have incurred loans and now saddled with the burden of repaying them. Without going into a judgmental frenzy of frustration and self-deprecation, because you happened to borrow more than required, or you should not have borrowed at all, it's time to cool yourself, plan and act fast. As a new graduate you have a very short window of around six months (maximum and varies from case to case) within which you can access several options before your repayment schedule gets almost immutable. This series of articles have been written to help you with planning and managing the repayment of your student loan debts after you graduate from college.

Study and understand the types of loans you have taken:

 

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Go through the promissory notes thoroughly and separate federal loans from non-federal loans, as the options and plans for repayment, as well as interest rates and terms vary significantly between the two.

Study easy repayment options:

Not all loans are as hard to deal with as private loans. There are a number of options out there including income based consolidation, and public service loan forgiveness. For federal loans, the Income Based Repayment Plan or IBR allows most federal student loans to be capped at an amount which is bearable for you, based upon the size of your family and income level.

IBR can limit your monthly loan repayment installments at 15% of your discretionary income. At least, up to three years after commencing repayment the government would pay the interest on subsidized loans which are not covered by the reduced monthly payment. Any outstanding balance after 25 years of qualifying payments is forgiven. From 2014 IBR can cap installments at 10% of your discretionary income and the outstanding balance at the end of 20 years of qualifying payments would be forgiven.

Also, do not rule out PSLF or the tax-free loan forgiveness that allows the loan balance to be forgiven for borrowers who make 120 qualifying payments while working in the public service, including services like a non-profit hospital or university. Now that's a good incentive to work for the country.

However, it is beneficial to consult an expert, for, if done wrong, sometimes, IBR payments can end up being higher than your options under a consolidation plan.

When to consolidate:

In case of federal loans, among several repayment options, consolidation of different loans with variable interest rates should be done to create a single, understandable, monthly payment schedule. It will also help to convert variable rates to a fixed rate.

Remember during consolidation that you are allowed to leave out several low-interest loans like Federal Perkins Loans, and bundling them in with other loans into a single consolidation can be a mistake.

Also, wait till the end of your grace period before consolidating, because consolidation compels you to begin repayment immediately.

Please read the second part of this article.