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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 accumulate a large amount of debt. For most, the degree is worth the burden of paying off student loans long after graduation. However, these questions remain: How should the debt be repaid? Are there any plans that can help make “payback” easier? What if a student can’t find a job right away?

There are plans available that offer flexible payment schedules. Students applying for a Federal student loan can choose a graduated repayment plan that will allow them to make smaller payments upon graduation, and larger payments when they are earning more money in the workplace.

Students also have the choice of an income-contingent repayment plan. This plan requires them to pay a fixed percentage of their postgraduate income toward their student loan. This percentage could be approximately 5% to 10% of anything above the poverty level of a single person, which is $11,490, according to the Department of Health and Human Services poverty guidelines (HHS, 2013).

A third choice is an extended repayment plan that offers monthly payments and allows graduates to extend their loan payment schedules from 10 to 15, or even 20, years.

Deferment or forbearance may also be a temporary option for graduates in a financial bind due to unemployment or other extreme hardship. In select situations, borrowers may qualify for other repayment alternatives through their loan servicers.

Consolidation Offers Flexibility

For students who already carry a substantial amount of debt, existing loans can be consolidated with a direct loan from the government under the Student Loan Reform Act of 1993. This plan offers a more flexible repayment schedule while interest rates remain the same.

To be eligible for this plan, student loan recipients need to ask their original lender for an “income sensitive” repayment option. The plan adjusts the monthly payments for the loan’s capital, but not the interest, to annual income. If the original lender will not agree to this option, the student 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 income. Because the payments are withdrawn from wages, there’s less paperwork. Second, as wages increase, the percentage withdrawn from pay will also increase, allowing the loan to be paid off more quickly and with less accrued interest.

For students who need to borrow for the current school year, direct loans (and the income-adjusted repayment plan) are also available if they’re attending one of the schools participating in this plan. Parents may also be able to obtain a Direct PLUS loan for up to the entire cost of their children’s college education.

For more information, contact the Federal Student Aid Information Center at 800-433-3243, or visit online at www.studentaid.ed.gov.

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