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Payback Time: Facing Student Loans

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Payback Time: Facing Student Loans

It takes four years, on average, to graduate from most colleges and universities. During that time, students can amass some hefty debts. But, for many people, the degree is certainly well worth the burden of accumulated debt. So, these questions remain: How should you repay the debt? And, are there any plans that can help make the “payback” easier?

Today, there are more plans available that offer flexible payment schedules. Students applying for a federal student loan now can choose a graduated repayment plan that will allow you to make smaller payments upon graduating and larger payments at a later time when you may be earning more money in the working world.

Students also have the choice of an income-contingent repayment plan. This plan calls for them to pay a fixed percentage of your postgraduate income toward their student loans. This percentage could be approximately 5% to 10% of anything above the poverty level of a single person, which is $10,830 according to the Department of Health and Human Services (2009).

A third choice is an extended repayment plan that can lower monthly payments an estimated 20% to 30% and allow graduates to stretch out their loan payment schedules from 10 to 15, or even 20, years.

Consolidation Offers Flexibility

There is also good news for students who are already debt-laden. Under the Student Loan Reform Act of 1993, existing loans can be consolidated with a direct loan from the government. This plan offers a more flexible repayment schedule while interest rates remain the same.

To be eligible for this plan, student loan recipients need to ask their original lenders for an “income sensitive” repayment option. This plan adjusts the monthly payments for the loan’s capital, but not the interest, to annual income. If the original lender will not agree to this option, they may then be eligible for a direct loan from the government.

Two advantages of a direct government loan are as follows: First, the monthly installment payments of principal and interest are contingent upon income. Because the payments are withdrawn from wages, there will be less paperwork to muddle through. Second, as wages increase, the percentage withdrawn from pay will also rise, allowing the loan to be paid off more quickly and with less accrued interest expense.

For students who need to borrow for the current school year, direct loans ( and the income-adjusted repayment plan) are also available if they’re attending one of the schools participating in this plan. Parents may also be able to take out a direct loan for as much as the entire cost of their children’s college education.

For information or inquiries regarding federal student aid programs, contact the Federal Student Aid Information Center at 800-433-3243, or check them out online at www.studentaid.ed.gov.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as specific tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. The client must rely upon his or her own professional advisor before making decisions with respect to these matters.

Copyright © 2010 Liberty Publishing, Inc. All Rights Reserved.

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This article appears courtesy of Karl Susman. Karl Susman is a representative of the New Engl and Life Insurance Company. He focuses on meeting the individual insurance and financial services needs of people on the West Coast. You can reach Karl at the office at (424) 785-4337. New Engl and Life Insurance Company, 501 Boylston Street, Boston, MA 02116

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