top education 2The other day, I ran across an excellent article on Forbes.com discussing student loan repayment options. It drew my attention because I have a mix of public and private loans that I am currently in the process of repaying. I thought I knew all of the different repayment options and lingo, but I was pleasantly surprised. The article starts with basics like level repayment, and goes further to explain  additional topics like the difference between deferment and forbearance.

I have summarized below the 4 realistic repayment options discussed in the article (you’ll see why the 5th one doesn’t count).

Option 1: Repay as scheduled

This is your basic level repayment scenario. Receive a bill each month and pay it on time. The payment amounts can fluctuate quarterly or yearly if it is a variable rate loan (most private loans are).

Due to my personal experience with CitiAssist loans, I’m aware of an additional type of level payment system that Citi provides called graduated repayment. This option adjusts the payments so in early years the payments are smaller and in later years they are larger in order to still have the loan paid off in time.

Option 2: Consolidate Your Loans and Lengthen the Payment Schedule

I think this really applies to federal loans. I’m not sure if its possible to consolidate private loans because they are variable rate (if anyone knows, please post a comment). Federal loans, like my Stafford loans from undergrad were set up to have a 10 year repayment term. Consolidation provides the option to extend that time frame, lowering payments, but resulting in more interest paid over time.

When I consolidated my federal loans in June of 2006, I was able to get a better rate. I opted to keep the 10 year repayment schedule with the lower interest rate. Consolidation may be beneficial for older loans at higher rates, while current loans would maintain the same interest rate but have an extended repayment schedule.

Option 3: Income Based Repayment

This option is definitely only available for federal loans. It has been the topic of much news this past summer because of the cap on the loan payments as a percentage of gross income. Specifically 15% of the income that exceeds 150% of the federal poverty level (according to the article that comes to $16,245 for single individuals). The cap sounds good, but here’s the controversy, any debt not paid off in 25 years is forgiven. Forgiven DOES NOT equal free. The amount forgiven is still taxed as income (Uncle Sam ALWAYS has to get paid).

I think this sounds like an excellent idea for individuals with only federal loans. My concern lies in taking 25 years to pay off this student loan debt. That time span is much longer than I am comfortable with, plus there is the risk that the loan payments are increased for income increases. Graduating college at 22, I could be paying until age 47!

If this option has peaked your interest, Forbes has another article dedicated to the topic of income based repayment, along with a student loan calculator for this repayment method.

Option 4: Deferment and Forbearance

This section is where I learned the difference between two terms I always thought to be synonymous. These options focus on time spans when repaying is not a possibility (i.e. going back to school, getting laid off, starting your own business).

Deferment is when the lender allows the borrower to skip payments for a specific period of time. My CitiAssist loan allows me the flexibility to defer payments for up to 12 months. These 12 months can be used consecutively or intermittently as long as I speak with them in advance. Interest still accrues while payments are deferred and it may be capitalized at the end of each deferment period.

Forbearance is similar because payments can be skipped and interest still accrues. The big catch with forbearance is the final loan payoff date is not pushed back because payments are skipped. So in order to still be paid off by the same final date, the remaining payments are increased or a large balloon payment is added to the end of the loan.

When given the option, I would choose deferment.

Option 5: Defaulting

This one I would like to call the non-option. Defaulting on student loans, both federal or private gets you no where. Collection agencies step in, wages can be garnished, and filing bankruptcy doesn’t help. Student loans will haunt you for the rest of your life, so its best to constantly communicate with the lender and make payments when possible. They even have “rehab” programs to help with making payments.

I think the article provides a very organized breakdown of the choices. I’ve already excersized option 2 and am currently following option 1, but its good to know what other alternatives exist.

Related posts:

  1. Want to Deduct Private Student Loan Interest?