Ask the Expert, College Planning, Finances

ASK THE EXPERT: College Financial Planning, Part 5

For the last part of our college financial planning series, we wanted to know what students should consider when they are repaying their loans and what they should do if they have accrued a large amount of debt.  We once again spoke with Mark Kantrowitz, publisher of and, to help us answer these questions.

The first thing Kantrowitz advises is that if a student can make the required monthly payments and accelerate their payment of the loan, then they should consider making extra payments on the loan with the highest interest rate (after making the required payments on the loan). While not everyone can do this, students who can will pay off their loan earlier, reduce the interest accrued on the loan, and ultimately save a significant amount of money.

If a student runs into financial hardship and is unable to make their monthly loan payments, Kantrowitz advises students to speak with their lender immediately to find out their options.  For federal loans, in particular, there are a variety of options that will help them to continue to make payments without causing too much financial strain.

The first option for federal loans is a temporary suspension of repayment, such as a deferment or forbearance.  Kantrowitz explains that this is an option best suited for those who experience temporary or very short-term financial hardship, which could include things like short-term job loss, mental leave, maternity leave, etc.  The problem with this option is that the interest on the loan will continue to accrue on at least a portion of the loan, which will increase the size of the loan.  However, Kantrowitz explains that this will not be a major problem should one require this assistance for only about 3 or 4 months, as not much interest will have accrued over that time.  He advises that students not extend this type of assistance for much longer than that, and explains that this type of assistance will also have only a 3-5 year limit (depending on whether it is a deferment or forbearance).

For those requiring more long-term assistance on their loan, Kantrowitz advises students to choose an extended or income-based repayment plan. The extended repayment plan will reduce the monthly loan payment by extending the term of the loan.  For example, if a 10-year unsubsidized Stafford loan’s repayment term is increased to 20 years, this will cut the monthly loan payment by one-third.  However, Kantrowitz explains that this will also double the interest paid over the term of the loan, and will ultimately increase the total amount you pay on the loan.  “The longer the term of the loan,” says Kantrowitz, “the more you’ll pay.”

The second long-term option for repayment would be the income-based repayment plan.  This repayment plan will base the monthly loan payment on 15% of one’s discretionary income.  According to Kantrowitz, discretionary income is defined as the amount by which one’s income exceeds 150% of the poverty line.  Therefore, if your income is below that amount, your monthly loan payment would be $0.  However, this option also extends the term of the loan and can end up increasing the amount you pay over time.

According to Kantrowitz, there are a few benefits to choosing the income-based repayment option.  He first explains that this is a good safety net should one run into financial difficulties and become unable to make monthly loan payments.  This option is also beneficial in that after 25 years of repayment, all remaining debt will be forgiven (a feature not offered by private lenders).  In fact, a new version of the income-based repayment will reduce the percentage of discretionary income charged from 15% to 10%, and it will shorten repayment from 25 to 20 years before the remaining debt will be forgiven.  Kantrowitz also explains that should one work in the field of public service [jobs such as a teacher, public defender, prosecutor, member of the military, city, state, or federal worker, or for any 501(c)(3) charitable organization], then all remaining debt will be forgiven after 10 years of repayment.

According to Kantrowitz, students should avoid defaulting on their loans as this can greatly limit their options.  In fact, in many cases, it will actually get much more difficult to repay the loan as there are many ways in which the debt will continue to be collected.  One way in which this is done is through a wage garnishment of up to 15% of total discretionary income.   This can also be done through the interception of federal and state income tax refunds.  On top of this, there will also be an increase of the term of the loan by almost 100%, in that 25% of each payment made (whether voluntary or involuntary) will be used to pay collection charges.  Therefore, a student will not only have to pay off the principal of the loan and the interest, but also the collection charges that come with defaulting on the loan.

Overall, there are things students can do before they run into trouble paying back their loans.  As mentioned previously, talking to one’s lender is perhaps the most important step whenever they are experiencing financial difficulties or hardship.  While their options may increase the amount they pays on the loan, it will prevent students from both going into significant debt and forcibly making payments on their loans.  By choosing to repay loans in these ways, students can greatly limit stress and misfortune by repaying their loans in the way that is right for them.