Posted on: Thursday, June 5, 2003
THE COLOR OF MONEY
College loans offer various repayment options
By Michelle Singletary
Benjamin Franklin wrote that "in this world nothing is certain but death and taxes."
Actually, for hundreds of thousands of newly minted college graduates, there's one other certainty — student loan debt.
Many students today couldn't complete their education without the help of federal student loans. Come graduation day, they'll have to start thinking about how to pay them off.
The U.S. Department of Education administers the Federal Family Education Loan Program and the William D. Ford Federal Direct Loan Program. Both the FFEL and Direct Loan programs offer four repayment options. Under each loan program, the four repayment plans differ slightly. For information about the specific options available for your FFEL loan, you will have to contact the private lender.
For students who used the Direct Loan program, here are the repayment options, according to the Department of Education's free "Student Guide" (www.studentaid.ed.gov): • Standard repayment plan. You pay a fixed amount each month until your loans are paid in full. Your monthly payments will be at least $50, and you'll have up to 10 years to pay off the loan. Your monthly payment under this option may be higher than it would be under other repayment plans because your loans will be repaid in the shortest amount of time. Choosing this plan will get rid of your student debt the fastest. • Graduated repayment plan. Your payments start out low, then increase, generally every two years. The length of your repayment period will depend on the total amount you owe when your loans go into repayment. For example, a student who has $10,000 in student loans would start off with a monthly payment of $49, but gradually that payment would increase to a final $109 per month. This plan may help ease the burden of student loans as you start your career. Your initial payments have to at least equal the interest that accumulates on your loan between monthly payments or amount to half of what you would pay under the standard plan. • Income contingent repayment plan. This gives you the flexibility to pay off your loan based on your income. Each year, your monthly payments will be calculated on the basis of your adjusted gross income, family size and the total amount of your loans. To participate in this plan, you must sign a form that permits the Internal Revenue Service to provide information about your income to the Department of Education. This information will be used to recalculate your monthly payment, adjusted annually based on the updated information. So for example, if you were making $40,000 a year, your monthly payment on a loan of $10,000 as of July 2003 would be $83. That's opposed to the $99 you would be paying on the same loan under the standard plan. • Extended repayment plan. Under this option, you'll still have minimum monthly payments of at least $50, but you can take from 12 to 30 years to repay your loans. The length of your repayment period will depend on the total amount you owe. This is also a good plan if you will need to make smaller monthly payments. Because the repayment period generally will be at least 12 years, your monthly payments will be less than with the standard plan. However, you may pay more in interest because you're taking longer to repay the loans. Remember that the longer your loans are in repayment, the more you'll pay in interest. If you don't choose a repayment plan when you first begin paying on your loans, you'll automatically be placed under the standard repayment plan. You can change plans throughout the life of your loan, as long as the maximum repayment period under your new plan is longer than the length of time your loans have already been in repayment.
Under the FFEL Program, you can change plans once a year. Under the Direct Loan program, you can change plans any time.
If you are planning to consolidate your student loans, you could still have the same repayment options with some variations. Be sure to check with the lender about their specific options.
Finally, college graduates often ask me what they can do about their student loans. I sense that what they are really asking is how they can get out of paying back so much money.
My answer is always the same. Pay back the loan. Pay on time and don't default.
It is a loan, not a grant. No matter how much you had to borrow to attend college or graduate school, remember you did get something out of the deal—an education.
