November marks a time to talk turkey about how to repay those student loans.
Are you looking for a way to keep the monthly payments as low as possible? Or a way to control your total debt? Because honestly, you can't have it both ways. Sort of like expecting to load up two plates on Thanksgiving – and drop 20 pounds by Monday.
College grads receive a six-month grace period before they have to start paying down their student loans. Getting a diploma in May means many will begin to repay those loans in November.
The real fun starts when you try to figure out what kind of repayment plan you might like to obtain for your federal student loans. You're looking at eight different kinds of repayment plans.
While some, budget-friendly plans make sense to help you avoid defaulting on your student loans, experts note that paying as little as you can in some cases could dig you deeper into debt.
"Students often focus on reducing that monthly payment as much as possible," said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.
"That actually increases your cost, and you're going to be in debt longer."
Low monthly payments stretch out debt
Consider someone who owes $30,000 in student loans. Assume a 5 percent rate.
Opting for a 10-year standard repayment plan would mean paying $318 a month and end up costing a total of $38,183.
What happens if you want to cut the monthly payments, say to $175 a month?
Then, you're looking at handing over $52,612 over 25 years, Kantrowitz said.
Yet college grads are often inundated with material telling them about how to avoid the standard plan and opt for something a bit more manageable each month.
"The federal government has been pushing income-driven repayment plans," Kantrowitz said.
In general, he suggests that borrowers opt for the repayment plan with the highest monthly payment that they can afford.
"This will save you the most money by paying down the debt quicker," Kantrowitz said.
Theoretically, a stronger economy could build a strong case for opting for a 10-year standard repayment plan.
Sacrificing early in the game by making higher payments each month can save a ton of money in the long run. The 10-year standard plan allows you to pay the least amount of interest over the life of your loan.
Payments are a fixed amount that ensures your loans are paid off within 10 years.
"Some borrowers who are confident that they can consistently make their monthly payments may want to steer clear of income-driven repayment and instead remain in a standard 10-year plan," said Will Sealy, co-founder and CEO of Summer, a New York-based startup that offers software to help borrowers keep track of their student loans.
Know what you owe
You'd want to create an account with each loan company listed on the FSA site. Doing so will allow you to find your monthly payment for each loan servicing company and track your payments over time, Sealy said.
High monthly payments kill some budgets
Yet making a $500 or $600 student loan payment each month simply isn't an option for many who find themselves in low-paying jobs.
As a result, researching an income-based repayment plan could be your lifeline to liquidity.
"If you really cannot make your monthly payment, it could be the thing that saves you from financial calamity," Sealy said.
Sealy, who previously worked with the Consumer Financial Protection Bureau on student debt issues, saidthat too often borrowers feel like they need to earn a mini-PhD in student loan debt to understand their repayment options.
Summer, which launched in 2017, is designed to help borrowers improve their financial health through smart repayment strategies.
Enrolling in an income-based plan isn't an all or nothing proposition, he said.
Someone who gets a job out of college might be able to opt for higher payments in a 10-year standard plan. But if that person loses a job, an income-driven plan could be a better option to ramp down monthly payments and deal with that financial shock.
College grads in the Class of 2018 can use the Summer service at www.meetsummer.org/2018-grads to walk through various options. In the future, those online tools will be available to other borrowers, as well.
Some pay more for student loans than rent
Income-driven repayment plans exist because millions of borrowers are facing real financial difficulties.
More than half of borrowers say their payments on student loans are higher than what they're paying for health insurance, according to a recent survey conducted by the Student Debt Crisis on behalf of Summer.
About 30 percent reported owing more each month on student loans than their rent or mortgage, according to the survey.
And 65 percent of those surveyed said they had less than $1,000 in their bank account.
Since 2009, the U.S. Department of Education created several new income-driven repayment plans. Such programs helped graduates caught in the tough job market during the Great Recession and afterward.
An income-driven repayment plan can help reduce the risk that the student will default on their student loans and damage their credit ratings in the future.
Typically, an income-driven repayment plan extends repayment periods from the standard 10 years to up to 25 years and, if certain rules are met, the remaining balance can be forgiven at the end of that period.
The popularity of such plans has grown. About 24 percent of student borrowers repaying their federal student loans were doing so with income-driven plans as of June 2016, according to a U.S. Government Accountability Office. And it has grown to 29 percent as of June 2018.
That compares with 10 percent in June 2013.
Summer noted that some borrowers in public service jobs may want to opt for an income-driven repayment plan to receive their maximum savings under the Public Service Loan Forgiveness Program.
Public Service Loan Forgiveness cancels the remaining balance on your federal direct loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. You need to complete an Employment Certification form as soon as possible while making payments.
Income-driven plans can help other borrowers lower their monthly payment and some may pay less in the long run because of the opportunity for student loan forgiveness after 20 years or 25 years of repayment, depending on the plan.
But that's not a guarantee. Some borrowers who select income-driven plans will pay more overall because of longer repayment periods, the GAO report noted. Some borrowers won't receive loan forgiveness because they will fully repay their loans before their repayment term ends or they won't end up qualifying for forgiveness.
The graduated direct loan repayment plan and the extended direct loan repayment plan will offer lower monthly payments initially but the loan forgiveness does not apply to those specific plans. As a result, some experts say may borrowers would be better off with income-driven plans.
Interest builds and builds
When you decide you want a plan with a lower monthly payment, you're agreeing to take on a longer repayment term – and more interest will be accruing.
Many borrowers don't understand that they will owe more than they borrowed to pay for college. Millions of borrowers take out unsubsidized Stafford loans, where the interest accrues while you're in college. The borrower is responsible for all the interest.
Many times, you wonder how someone could go to a fairly good college, but not an Ivy League school, and end up with what seems like a massive amount of student loan debt.
In many cases, it's because they've borrowed a good deal and they're stretching out the life of the loan with some extended or income-driven repayment plans. The borrower may be making payments but the money only goes toward the interest in some cases, not toward reducing the principal.
Under current tax law, any amount forgiven under these plans is subject to federal income tax.
About 39 percent of families say they haven't researched any repayment plans, according to stats from this year's How America Pays for College Report by Sallie Mae.
Many students – 57 percent – said they would prefer to make larger payments over a shorter period of time rather than stretch out payments to make the monthly payment more affordable.
On average, families spent $26,458 on for just one year of college tuition during the 2017-18 school year, according to a new report from Sallie Mae.
Nearly half of that bill was covered by income or savings. Another 28 percent was covered by scholarships and loans. And another 24 percent was covered by taking out student loans or other ways of borrowing.
Rick Castellano, a spokesperson for Sallie Mae, said many times students aren't focusing on what it will take to pay the bill.
"Many are thinking 'I just need these to get money to get to school,' " Castellano said.
"When you're thinking about paying for college, you want to go through that process with eyes wide open."
Contact Susan Tompor: firstname.lastname@example.org or 313-222-8876. Follow Susan on Twitter @Tompor.