This time of year is definitely a time of change. Kids are back in school. Maybe they’ve just headed off to college. Football season has begun. Perhaps a new career for recent graduates. Oh yeah, and if you finished attending college this last spring, your first student loan payment is coming due at any time now.
Yay! A new payment to start making too!
Ok, so my ‘yay’ is a little sarcastic. Unfortunately, as unexcited as we may be about it, that first big payment and a whole bunch more after it are going to be due.
Or are they?
If you just finished college this spring, you may well still be settling into your new normal. What the new normal means for your student loan payments could be a few different options.
First, if you have private student loans, you really only have two options. Pay according to the schedule you agreed to when you took out the loan, or don’t pay (and maybe a refinance into a different private loan).
Federal loans, on the other hand, give you a number of options depending on your situation and loan types.
Standard Plan – This is a ten-year payment plan with level payments, meaning they will stay the same over the life of the loan. As indicated by the name of this plan, it’s pretty much the default that your loans will end up in. This is also an amortized loan, meaning that by the time you are done with payments, you will have paid the debt in full.
Extended Plan – Still level payments, this can extend your payments over the next 25 years. The monthly payments are much smaller, but the total interest paid will be higher. This is also an amortized loan.
Graduated Plan – Another amortized plan, this one starts with lower monthly payments that gradually but steadily increase over time. The thought behind it is that as you move forward in your career, your pay will increase and you will be able to afford the higher payments that come later in the term of the loan, keeping low payments while you are still new in your field.
Income-Driven Plans – All right, there are a few of these out there, but they all work basically the same. Every year you have the loan, the loan servicer looks at how much you make, your family size, and where you live to determine how much of a monthly payment you can actually afford for that year. These can be stretched 20-25 years and payments can be as low as $0 per month while still being considered current. So what if you don’t pay off the full loan amount by the end of the term? Well, the remaining balance gets forgiven.
So which one is right for you?
Well, that depends. Maybe you have a good income and a low enough payment that you can just knock that thing out in 10 years or less. After all, the longer you pay, the more you pay due to interest. But maybe you need the extended plan to be able to afford the other pieces of life that you need or want.
If you are looking at the public service loan forgiveness program (yes, that really is a thing), you will need to be in an income-driven repayment plan. If you are looking at the TEACH forgiveness program, you will need to be in an income-driven plan. If you have a large family and lower income, an income-driven plan may be right for you.
Now, this income-driven plan sounds great. But what’s the catch? Well, at the end of the term, if you have student loan debt that is forgiven, that forgiven amount will be considered income. As our tax laws stand right now, you will actually have to pay income tax on the forgiven amount in the year that the loan is forgiven. Sure, 25% of the debt as a tax is a lot less than 100% of the debt as payments. But all of that 25% in a single year might still be a burden for many people. It can work; just be ready for the tax bill.
So where do you start? Well……
The National Student Loan Data System is the place to go to find all of your federal student loans. One login will show you all of the loans you have, what type they are, and all other pertinent information. This knowledge is the beginning of the process.
StudentAid.gov is a great website that will explain your options as far as payment plans and consolidations. There is also a repayment estimator. You can provide your FSA ID information and it will load all of your loans for you or you can wing it and manually enter them. It then shows you all of your options and the other terms that come with them, like length and interest paid.
Oh yeah, that’s what we do. At the Center for Financial Resources, all of our counselors are certified student loan counselors. We can help you figure out what you have, what you owe, and what might be the best option based on your own unique situation. You can schedule that appointment by going to our website or calling is at 605-330-2700.
So to sum it all up, you do have options. You just need to own your situation, be proactive, and find the best option for you. There is no single right answer, just the one that fits you best.
written by Breck Miller, Community Relations Coordinator
images courtesy freedigitalphotos.net
LSS Center for Financial Resources
Consumer Credit Counseling Service | Housing Resources | Sharpen Your Financial Focus| Financial Fitness Education
705 East 41st Street, Suite 100 |Sioux Falls SD 57105-6047
605-330-2700 or 888-258-2227
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