Repaying Student Loans

Repaying Student Loans

by Gary Foreman

I consolidated my student loans a few years ago and was in forbearance for the last few years. Now I’m starting to repay them at around $450 per month. I asked for a lower payment for the next few years (paying off credit card debt) and they told me the lowest they could go is an interest only payment at around $400/month. At that rate it is estimated that I will finish paying off my loan in about 30 years. Is this possible or am I getting swindled by this company somehow? My loan is about $50,000 but I can’t imagine $400 month is only towards interest. Help!!! – Anna

Like Anna, many former college students have found out that repaying student loans can put a financial crimp in your lifestyle. According to Nellie Mae the average student owes $18,900 at graduation.

Many former students find that their first jobs don’t pay enough to make loan repayment easy. Some even think that student loans can be ‘forgiven’. The government’s student aid site states “Federal student loans are real loans, just like car loans or mortgage loans. You can’t just get out of repaying a student loan if your financial circumstances become difficult…” In fact, in almost all cases, student loans are one of the few debts that even bankruptcy doesn’t eliminate.

Fortunately, the borrower does have some options. Anna has used ‘forbearance’. That’s a temporary postponement or reduction of payments so the borrower can handle other financial difficulties.

She also ‘consolidated’ which is refinancing one or more student loans. The length of the loan is often extended from the original 10 year plan to as long as 30 years.

Let’s look at Anna’s current situation. The consolidation stretched out the amount of time it takes to repay the loan but it also increased the interest rate. Could her payments really be $400 for interest only? Consolidated loans have an interest ceiling of 8.25%. Anna can do a rough calculation on her own.

A $50,000 loan at 8.25% would require $4,125 a year ($50,000 x 0.825) to cover the interest. That works out to $343.75 per month ($4,125 / 12 months). So the loan company might be overcharging Anna. They should be able to explain exactly how they calculate her payments and show her the math they used to get the answer.

They should also be able to help her compare different loan repayment plans. For each she should find out the interest rate, monthly payment and the total amount that she’ll have to pay to close the loan. The lowest monthly payment might not be the best option. It’s possible that a shorter term would have a lower interest rate and might not significantly increase her payment.

What other options are there? It might not work for Anna, but volunteering can reduce the debt. Find out about Americorps, the Peace Corps, VISTA – Volunteers in Service to America, and the Army Reserve or National Guard. Some social service, medical and teaching jobs can reduce or even eliminate student loans. Check with your loan servicer to find out what’s available.

If Anna owns a home with sizeable equity she might have another option. A home equity loan could offer a lower interest rate and lower payments than the student loan. Before she makes any move in that direction, she’ll want to study it carefully.

Anna may want to look at her lifestyle. Between student loans and credit cards, it appears that she’s having trouble living within her income. She’ll want to take corrective action now. Generally too much debt is a problem that doesn’t get better by itself. If left alone it will only get worse.

Anna may be wondering if it was worthwhile getting her degree. Studies show that money borrowed to get an Associates Degree or Bachelor’s at a public university will pay off. According to the Employment Policy Foundation a bachelor’s degree is worth an extra $2.1 million over a lifetime.

But, financing post graduate work on student loans can be dangerous. Some areas, like teaching, have pay scales that make it hard to repay significant amounts of student loans. In any case, we hope that her income grows quickly enough to make it a little easier to repay those student loans.

Gary Foreman is a former financial planner and editor of The Dollar Stretcher Website.