Loan Repayment and Debt

Unlike grants or work-study aid, loans remain a part of your life and your child's life long after college graduation. It's important for you and your child to give some serious thought to how much debt you're willing to shoulder and to map out a plan to repay loans as quickly and easily as possible.

Understand Your Debt Limit

How much debt is too much debt? Experts suggest...

• Parents: Some lenders advise parents to limit total debt repayments (including education loan repayments) to 37 percent of gross income.
  
  
• Students: Some advisors suggest that monthly student loan repayments should not exceed 10—15 percent of a new grad's starting monthly income.
  
  
• The interest rate for a Stafford Loan is fixed at 6.8 percent and the rate for a Perkins Loan is 5 percent. PLUS loans are fixed at 8.5 percent.
• Students can deduct up to $2,500 per year of education loan interest payments for the life of the loan. Parents who take out loans to pay for their child's education expenses can claim the same deduction. Some limitations apply. Consult IRS form 970 for details.

Loan Repayment Options

Most lenders will allow borrowers to adjust repayment terms to suit individual needs and circumstances. Always factor in the total cost of the loan when considering a change to your repayment plan.

Standard Repayment

Most students repay their loans using the standard repayment plan. Standard repayment involves making equal monthly payments over a 10-year period.

Other Repayment Options

The Federal Direct Loan program and numerous private lenders also offer the following flexible repayment options:

• Extended repayment: Depending on the total amount of debt and which lender is involved, the borrower can extend the repayment period to upwards of 30 years.
• Graduated repayment: Under this plan, payments gradually increase, usually every two years. Remember that your income and your child's income will likely be increasing over time, too.
• Income-contingent repayment: This plan ties the repayment amount to income and often allows for a longer repayment period.

Be careful to balance long-term cost of these repayment plans against short-term payment relief. Although you and your child will be paying less per month, you could end up owing (and paying) significantly more in the long run because you're slowing down your repayment of principal.

Note: You should be able to switch back to a standard repayment option at any time. Once you are able, you should also consider increasing your monthly payments.

Repayment Tips

Don't forget to:

• Account for fees when you are considering education loans. Up to 4 percent of the total amount of a loan may be eaten up by up-front fees (3 percent to the lender, 1 percent to the guarantor).
• Visit the aid office when you feel you or your child are taking on more than you can afford. The financial aid staff will be able to advise you and your child about reducing your level of borrowing and managing your current debt.

Loan Lingo

Here are some repayment terms you should know:

• Loan consolidation: Loan consolidation means combining outstanding loans into a single loan with one monthly payment. You or your child will have more time to pay off debt, but in all likelihood, the total cost will be higher.
• Deferment: This is a period during which payments are not required on a loan. For example, your child can receive a deferment while enrolled in graduate school, serving in the military, or involved in the Peace Corps or other public service programs.
• Forbearance: This provision allows you to temporarily stop loan payments because of financial hardship.
• Cancellation: Some programs allow borrowers to work off loans by teaching in low-income areas or areas with teacher shortages.

Repaying a PLUS Loan

PLUS loans are popular, non-need-based loans offered to parents of dependent students by the federal government. Parents who qualify for PLUS loans are able to borrow up to the full cost of education, minus any financial aid.

PLUS loan repayment begins 60 days after the school receives loan funds. You can choose to make full payments or interest-only payments while your child is in school. The typical repayment term is 10 years, but can be extended.