Choosing a Strategy to Repay Student Loans

There are several strategies for repaying student loans. No matter which option you choose, the general goal of repayment is to avoid default, and to make the best possible use of resources.

Many colleges now have ‘default prevention’ programs that try to put you on the right track toward repayment of your loans. At your college loan exit interview, ask about specific payment programs that promote prompt and timely payments, and also allow for online or automatic payments.

Look Ahead

In preparation for repayment, estimate your expected annual debts. While many graduates cannot accurately guess what their income will be before they secure jobs, they can build their income estimate “backwards”. By estimating your monthly expenses, you can project the income that you will need to live comfortably.

In general, the monthly payments for your student loan(s) should be around 8%, and total expenses for fixed debt around 35-40%. As your income increases (hopefully) year by year, your debt-to-income ratio should go down, allowing you the chance to invest, retire other debt, and save!

There are laws that designate certain duties you have as a borrower even before your loans technically are “due”. For example, you must keep your lender and school informed if your current address changes, you plan to transfer to another school, your student status drops below half-time, you quit school altogether, or you change your name. All of these changes can affect your loan, so it is your responsibility to make sure that your current information is on file.

Repayment Basics

Most borrowers will have several decisions to make about payment schedules. As a general guideline, you never should choose the longest period possible to pay off your loans. Loan rates are low, so if you pick the longest time period available - 25 years (if you have not consolidated) - you essentially may cancel out the benefits of low interest rates.

Even if the long-term payment choice really is necessary for your situation, you should pay more than the minimum monthly payment as often as you can. It is very rare to have a pre-payment penalty on student loans.

Many loans, including the Federal Stafford and loans through the Federal Direct Loan Program, have a grace period of six months. The grace period usually begins after graduation, but it also may start if you drop to half-time enrollment. If you switch to less than full-time status, confirm with your financial aid office all loan implications.

Other loans like FPLEP and PLUS loans have no grace period. Such loans may require interest payments while in college, or payments “60 days after the final loan disbursement”.

Prepayment Possibilities

Prepayment is a good strategy toward eliminating your debt because there rarely are penalties for speeding up payments, or for periodically making large payments, on student loans. Before embarking on this route, confirm that your loan plan does not involve a penalty for such action.

Repayment Flexibility

There are two basic flexible plans, and both aim to prevent a default or “cure” a delinquency.

• Graduated Repayment
• Income-Sensitive Repayment; This option goes into affect for five years. It may include interest-only payments (which is not at all preferable), but it is better than default.
  

Graduate School

If you choose to continue on to graduate school, your attendance will cause a new grace period to go into affect for most loans. On the other hand, graduate loan amounts are running an average of $35,000 after completion, and adding this debt to a prior undergraduate loan may not be the best plan. If you can afford it, it might be a good idea to pay off the principal on your undergraduate loans prior to further education. Fortunately, if this is not possible, graduate degrees tend to add 15% in salary per year.

As a graduate student, look into obtaining a graduate assistantship. This will pay for your tuition at most state schools, and probably even will earn you a modest stipend or salary.

Conclusions

The best strategy for student loan repayment is to follow the standard repayment plan, and to deviate as changes in interest rates, consolidation, and possible payoffs occur. This plan is based on 120 equal payments that span ten years.

If you have borrowed more than $30,000 you will have more flexibility in your repayment, but this schedule generally accommodates almost all graduates well.