Finding the Right Way to Repay
Concerned about the debt you’ll have to undertake in order to pay for college? You’re definitely not alone! Our College Hopes & Worries Survey found that the biggest concern among respondents is the level of debt they’ll accrue over the course of their education. More now than ever before, it is likely that you’ll accrue at least some debt in order to obtain a degree -- and you'll eventually have to repay it.
If you find yourself considering financial aid, here are some of the most common loan types:
- Direct Loans
- Supplemental Loans for Students (SLS)
- PLUS Loans
- Grad PLUS Loans
For these, there are several options for repayment. I’ve put together a little guide to help you choose the right one for you.
This plan calls for loans being repaid in equal installments over up to ten years. Does ten years sound like a while to be paying something off? Usually I’d agree! But it’s actually one of the shorter periods for repayment. The goal here is to get your loans paid off as quickly as possible, so it lands you with the least amount of interest as well.
This is a good plan for people who have relatively little debt or have enough income to afford the higher payments.
Extended plans can take up to 25 years before being fully repaid. But if this plan takes 2.5x longer to pay off than the standard repayment, what do you think happens to the interest on those loans? Hopefully you don’t think you’ll be paying the same amount! Taking longer to pay off your loans means you’re also accruing more interest, so the amount you end up paying when all is said and done goes up dramatically.
To be eligible for this type of plan, students must have more than $30,000 in Direct Loans.
You’ll start out with low payments that increase every two years, ultimately ensuring that your loan will be repaid within ten years. The minimum amount you’ll pay each month will have to equal at least the amount of interest your loans are accruing. Interest expenses here are much higher, too, when compared to regular standard payments.
This is a good choice for people whose earnings are currently low but are expected to increase over time.
Income Contingent Repayment
If you’re lacking a stable income and are unsure if you’ll have one in the near future, income contingent plans might be a good option. Payments are based on your level of debt and your current income, and they can often be lower than the interest accruing on your loans. (This is called negative amortization — be glad you won’t see that on the ACT or SAT!)
Of course, paying less than you’re accumulating can lead to substantially more debt in the end, but to counter that, the government will forgive any unpaid balance after 25 years.
These plans are only available if you have federal Direct Loans.
Pay As You Earn
There are now two versions of this plan, and each has its own set of requirements. (Head over to the Federal Student Aid site to read through them in detail to see which you qualify for.) But the general idea is the same (and fairly similar to income contingent repayment): Your payments will be calculated as a percentage of your income and they’ll be recalculated each year accordingly. And after either 20 or 25 years, depending on the plan, any outstanding balance can be forgiven.
Something to keep in mind here for married borrowers: If you’re earning a less-than-stellar income but your spouse brings in lots of dough, that may also be considered. Weigh your options wisely and think about your reasoning for choosing this plan.
There’s a lot that goes into paying off your loans, and it’s crucial to consider every option in order to find those that best suit you. Also, keep in mind that your decisions on these are not set in stone, so you can change your mind if circumstances change.
Regardless of which plan you’re leaning toward, I recommend looking at the Federal Student Aid guide to see more details (exact payment calculations, qualifications, etc.) on each of these plans. And while you may not have to think about choosing a plan until after you graduate, my advice stands here as with any part of the college process: Start thinking now to reduce your stress later! Plus, being aware of your loans as you accept them can help you find motivation to seek other ways to find funding for college. (I have a whole book on that, too! Check out 8 Steps to Paying Less for College if you want tips on how to do just that.)