Candice Choi

Graduation means student loan payments aren’t far off, so know your options

By Candice Choi
Associated Press / May 6, 2010

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Graduation season is here. Which means student loan bills are close behind. There are some payment options graduates will want to keep in mind.

Payment plans
Don’t fear being handed a bill with your diploma; most federal loans come with a six-month grace period. But interest accrues during that time, so the sooner repayment starts, the better.

The exception is with subsidized federal loans, in which the government waives interest charges until the loan comes due.

The standard payment option spans 10 years, but there’s no penalty for paying off debt earlier.

Those pursuing fields that don’t pay a lot will want to look into a program called income-based repayment, or IBR, introduced last summer to help make debt more manageable. Essentially, it caps payments at 15 percent above any earnings beyond $16,000 or so. Any debt remaining after 25 years is forgiven.

Eligibility depends on a formula that weighs education loan debt against income; a calculator at can help determine whether borrowers qualify. Those in both the direct and Federal Family Education Loan programs can apply.

A new law makes IBR even more favorable, in part by capping payments at 10 percent of income. But the changes don’t go into effect until 2014 and will apply only to new borrowers.

A provision already in place forgives debt after just 10 years of repayment for those who work in public service. This perk is available only to those with direct loans, however. So those with a FFEL loan would need to consolidate it under the direct loan program to qualify.

There are a couple other options. Borrowers can apply for unemployment or economic hardship deferment for up to three years. Income needs to be around $16,000 or less to qualify for economic hardship. And even then, interest continues piling up on the loans.

A consolidation loan is used to combine several federal loans, so borrowers only have to pay a single monthly bill. Private lenders are no longer offering them, but FFEL borrowers can get consolidation loans through the direct loan program.

A new interest rate will be based on the weighted average of the loans, so interest charges will be about the same under a consolidation. But that average will be rounded up to the nearest 1/8 percent, so there’s a small cost for the convenience.

You can typically only consolidate loans after you graduate. As part of its overhaul, however, the government is letting students in school consolidate loans between July 1 and June 30 of next year if they want to deal with just one lender.

One drawback: Consolidation loans often extend repayment, meaning overall cost will be higher.

Candice Choi writes for the Associated Press.