Taming Your Student Loan

Graduating was the easy part. Now, here's how to tackle one of your biggest debts.

many private lenders, let you choose from several repayment options in addition to the standard 10-year fixed payment schedule. To apply or get a list of terms, check with your creditor. Here are those options:

Income-contingent plans calculate how much you can pay monthly based on your salary, and can stretch out payments as long as 25 years. Whatever balance remains afterward, although forgiven, is taxed as income.

In graduated payment plans, the amount you pay back each month increases steadily over time, with the assumption that after a few years on the job market, your salary will begin to increase.
Finally, extended payment plans lower your monthly payment by stretching your repayment over a period as long as 30 years.

To get a better idea of how tinkering with terms can alter how much you pay and when you finish with your loan, consider the following example. Say you took out $40,000 at 8%–a student debt typically granted a six-month grace period before payments start, and due in 10 years. As is, you’d pay $505 a month. All told, you’d pay the bank $60,567, including $20,567 in total interest. Opt for a graduated payment schedule and stretch the payment period out to 15 years. The first two years, you pay $277 a month, $354 a month years three through five, and $455 a month years six through 15. At the same time, though, you’ll repay $71,559 on the $40,000 you borrowed, including $31,559 interest.

Another way to go is consolidation. Consolidation amounts to taking out a new loan to pay off old ones. In that way you combine payment of several loans into one, usually extending your payback period and cutting down on the amount you pay each month. Your lender can fill you in on consolidation terms and conditions. Van Duvall of Emory University, however, says consolidation is a last resort in her book. The reason: graduates often get better terms but at the price of paying two to three times more interest over the life of the loan. Let’s return to our $40,000 loan at 8%. If you managed to refinance at 7% and stretch payments out 15 years, you’d owe $372 monthly, less than the $505 under normal terms. No matter how much easier, though, you’d end up paying $66,981 back on the $40,000 you borrowed, for a total of $26,981 in interest, compared to $20,567 under the original terms.

For more on the ups and downs of consolidation, contact the Federal Direct Consolidation Loan Information Center (800-557-7392) or the three main private consolidators mentioned above: Sallie Mae, USA Group and Citibank.

If things are really rough, you have a choice between forbearance and deferment. For specifics, check with your lender. Under a forbearance, you’re allowed to postpone or reduce loan payments for a set amount of time, or you’re allowed to extend the time you pay a loan back. Interest, though, keeps accruing during your forbearance. Remember, also, that a forbearance is granted at the discretion of the holder of your

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