Unfortunately for most graduate students, the debt they have after earning their degree is a simple fact of life. What is not so simple for many is how to repay that graduate school debt.
The bottom line is that the debt must be paid, but students have several avenues they can take to repay the loans they had to obtain in order to continue their education.
A practice that will help students when it comes to paying debt in graduate school is keeping all financial aid and loan documentation together and organized. When they obtain their loan, students will be granted a grace period after which they must begin repayment. How much they can afford to pay each month toward loans should be based on projected future earnings and other financial obligations, including any credit card debt incurred during graduate school.
Debt repayment plans
Graduate students can repay their loans in several different ways, and each option varies regarding monthly payments and accumulation of interest payments. The most basic plan is the Standard Repayment Plan, which requires graduates to pay the same amount each month for 10 years. Those who choose this plan pay less interest than others may, because their payments are higher and the debt is paid more quickly.
Graduated Repayment Plans are designed for graduates with low incomes and who are beginning a career or business. Payments begin low and increase every few years. However, if this is the plan one opts to use to pay graduate school debt, it is crucial to realize that interest can add up rapidly, as it is based on the amount of the unpaid balance.
Graduates who need a more flexible repayment plan can choose the Extended Repayment Plan, which lengthens the term of repayment to 12 to 30 years, depending on the amount of the loan. Many lenders allow for the combination of extended plans with graduated payments. Payments will be lower, but other costs will increase.
The Income-Contingent/Income-Sensitive Repayment Plan involves monthly payments that are annually based on what the graduate earned the year before, household income and the amount of the loan. Annual payments will always be 20 percent of discretionary income or lower. In order to utilize this plan, graduates must allow the IRS to share their income information with the U.S. Department of Education.
More loan payment options
If you cannot work with one of the repayment plans above, other options exist. Deferment will suspend eligible loan payments for a fixed period of time. Meanwhile, forbearance will temporarily suspend payment, allowing for a time extension or temporary reduction of monthly payment amounts. However, if this is the way graduates choose to pay off debt, they should keep up with the interest payments to prevent costs from building up.
Graduates can also seek to negotiate new repayment terms that better suit their income. Federal employees may be eligible for the government's Federal Student Loan Repayment Program. The program enables certain agencies to make payments on eligible workers' federally supported loans. Agencies can pay up to $10,000 per year.
Another repayment alternative is to consolidate graduate student loans. Consolidating loans has its benefits and its drawbacks, and can be confusing. However, graduates can consolidate loans whether they are federal or private loans. While private consolidation interest rates can be either fixed or variable, federal loan interest rates are fixed.
Loans cannot be consolidated if in default, and before consolidation, graduates must consider how many loans and lenders they have. They should also determine what their other monthly financial obligations will be. The biggest benefit of consolidating loans is that repayment terms can be extended and monthly payments may be reduced by as much as 51 percent. Check out our article about consolidating graduate student loans.
No matter what option you choose to pay off graduate school loans, you should avoid default any way you can. If graduates don't pay and they default, lenders can seize a portion of their paycheck and all their tax refunds. In addition, loan balances will increase, collection fees will mount and credit will be damaged.
Obviously, you don't want that, especially as you start your successful new career. So take advantage of the options available and get the weight of debt off your shoulders.
It's important to remember that policies change. Make sure you research your options carefully. These links will help you get informed:
- US Department of Education - Offices of Federal Student Aid
- Ed.Gov - Federal Perkins Loan Program
- Ed.Gov - Direct Stafford Loans
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