With college tuition being one of the areas of the economy that consistently grows faster than the overall rate of inflation (the other one is medical costs: no surprise there), more and more college students must rely on student loans to finance their education. That means that most of today’s students will have to budget for student loan repayment once they graduate and/or start their first jobs. In fact, after housing costs, student loan repayment is probably the single largest monthly expense for many recent grads.
Death, Taxes… and Student Loan Repayment
The government wants to do everything possible to make sure you can get money for education, so it subsidizes and supports the student loan program—including providing many guarantees for lenders who offer student loans. Therefore—you guessed it—the government will also do everything within its power to make sure you repay your student loans. Like death and taxes, student loan repayment is pretty much inevitable. Not that you’re considering trying to get out of paying anyway, but the government has an assortment of increasingly unpleasant ways to make sure your student loan repayment is completed. The good news is that with good communication, you can usually avoid getting on the government’s “naughty” list. Not only are there hardship provisions, but there are also a number of options for student loan repayment.
Which Option is Right for Me?
One of the first things you’ll want to do, as you approach graduation and your first job, is get access to a good student loan repayment calculator, so you can get an accurate picture of the various student loan repayment programs and their impact on your budget. There are a variety of choices, and all of them have advantages and disadvantages, so it’s important for you to calculate how each student loan repayment program will impact your monthly income.
Level Repayment
Level repayment is probably the most popular choice for student loan repayment. Just like your car payment or any other secured loan, you pay the same amount, month after month, until the loan is paid back. A portion of each payment consists of interest, and a smaller amount (especially at first) goes toward the original principal.
Graduated Repayment
As a new college graduate, it’s likely that, like many others, your earning power won’t be huge. Guess what? Student loan providers know this, and many offer a graduated repayment schedule for student loan repayment. This means that the payments are lower in the early years, but increase the farther you go, since your chances of earning higher income are greater in future years. If you expect your income to increase over time, this could be a good option to consider.
Income Sensitive Student Loan Repayment
This is probably the most flexible option for student loan repayment, but beware: it can also be the most expensive. It just makes sense: the longer you take to repay your student loan, the more you pay in interest. However, if your income is uncertain, this can be an option to keep from defaulting—the very last thing you want to do.