Calculating the Future of Your Student Loans

College tuition is expensive and growing more costly every year. In 2009, approximately 60 percent of students received financial aid to help pay for tuition. Financial aid allows you, as a student, the opportunity to pay for college without making payments until you graduate, with the exception of grants and scholarships. After graduation, you have a six-month grace period for Federal Stafford Loans and a nine-month grace period for Federal Perkins Loans. Even though you do not have to make payments right away, it's important to learn the facts about repayment options and interest rates, so that you won't be making payments at the same time your own kids are starting college.

Know your loan information:

You should always check your loan status when there is a rise in interest rates, to confirm your balance, and to make sure everything is in order. You can access your loan information anytime at www.nslds.ed.gov or at your lender's website.

Pay your interest:

It's a good idea to pay the interest on your loans while you're still a student or immediately after graduation. Paying the interest will help to minimize your payments after the grace period ends. If possible, allocate an amount from your paycheck each month to go towards paying down the interest. If you're not sure as to how much to pay each month, you can use the Simple Daily Interest Formula below.

Simple Daily Interest Formula:

Number of days since last payment x Principal Balance Outstanding x Interest Rate Factor = Interest Amount

Interest Rate Factor:

The interest rate factor helps to determine the amount of interest that has accrued on your student loan. Calculate it by dividing the interest rate by 365.25, which is the number of days in a year.

The Federal Student Aid website provides additional information and examples on interest rates and repaying student loans, at www.studentaid.ed.gov.

Repayment Options:

After your grace period ends, it's time to start repaying your loan(s). How are you going to do that? There are several options and repayment plans to consider. Choosing the right plan is important, since the plan you select will determine the amount you're going to pay monthly over a period of time. Below are the repayment plan options.

• Standard: The Standard repayment plan allows you to pay a fixed amount each month for up to 10 years. You'll have to pay at least a minimum of $50 per month, since you'll be repaying your loans in a shorter amount of time. The benefit of this plan is that it allows you to pay off your loan quickly, which means that less interest has a chance to accrue.
• Extended: The Extended repayment plan allows you to pay a fixed amount each month for up to 25 years. Your monthly payment will be lower than with the Standard plan, since you'll have more time to pay off the loan. The benefit of this plan is that your monthly payments are lower, and you have more time to pay off the loan. The downside to this plan is that because you have this additional time, more interest will accrue, ultimately causing you to pay more money. In order to qualify for the extended plan, you must have more than $30,000 accumulated in outstanding FFEL Loans. If you have a Direct Loan, you must have more than $30,000 in outstanding Direct Loans.
• Graduated: The Graduated repayment plan starts the payments at a low level and then gradually increase every 2 years until the balance is paid. With every increase, the minimum payment can never be less than the interest accrued monthly, but will never be more than three times greater than any other payment. This plan is a good option if you feel that your income will steadily increase over time.
• Income Based Repayment (IBR): The Income Based Repayment plan is a new plan for all major types of federal loans given to students. With IBR, the required monthly payment is restricted to an amount that is projected to be affordable, based on your income and family size. You're eligible for IBR if the monthly repayment amount is less than the monthly amount calculated under a 10-year standard repayment plan. If you repay under the IBR plan for 25 years and meet other requirements (income and family size) you may have any remaining balance on your loan(s) cancelled. Also, if you work in public service and have reduced loan payments through IBR, the remaining balance left after ten years of work in a public service job could be cancelled.
• Income Contingent Repayment (ICR): The Income Contingent Repayment plan, which is for direct loans only, allows you to meet your Direct Loan responsibilities without causing excessive financial difficulty. Each year, your monthly payments will be calculated on the basis of your AGI (adjusted gross income), family size, and the total amount of your Direct Loans. You are allowed up to 25 years to pay off your loan. Under this plan, if you have any balance left on your loan after 25 years (deferment or forbearance does not count) the unpaid portion will be released. Although you may still be required to pay taxes on the amount that is discharged. This plan is ideal if you expect to maintain a modest income over a long period of time, so that you have the freedom to pay the loan off over 25 years.
• Income Sensitive Repayment: The Income Sensitive Repayment plan, which is for FFEL Loans only, allows you to make a monthly payment based on your annual income over 10 years. Your monthly payments increase or decrease as your income level changes.

Information on repayment structures derived from www.studentaid.ed.gov.

The first three steps you should take are to pay the interest as soon as possible, to choose a plan that fits your needs, and to try to pay higher than the minimum payment when possible. Knowing the facts and preparing accordingly are the keys to understanding how long you'll be in repayment - and to helping you start your repayment future on the right foot.

To help budget and calculate your finances, use our budget planner and calculators.

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