The Student Loan Shuffle

06/11/2012 9:00 am EST


Terry Savage

Author, The Savage Truth on Money

There are lots of ways to repay the government for your federal student loans, but the important thing is that you do so as soon as possible, writes MoneyShow personal finance expert Terry Savage.

Congratulations! You graduated. Now start repaying your student loans!

Sadly, your college degree didn’t come with a job guarantee. For many graduates, the idea of even thinking about starting to repay those student loans is a nightmare. But even if you don’t have an income, you must deal with your student loans within six months of graduation.

There are several helpful alternatives that will postpone the repayment process until you have the money to do it—albeit the interest will keep building.

And speaking of interest, you’re right if you think student loan interest is a giant rip-off. Until Congress changed the rules in 2006, student loan rates were tied to 90-day Treasury bill rates. If that were still the law, you’d be paying about 0.1% in interest—about the same amount the Fed has decreed that bank depositors should earn on their savings!

Instead, subsidized federal student loan rates are currently 3.4%—scheduled to jump to 6.8% in a few weeks. Unsubsidized federal loan rates are already at 6.8%, and have been for a while, and parents who take out federal PLUS loans are paying 7.9%! Surely that’s no way to encourage an educated workforce—but that’s another story.

Getting Ready to Repay
The first step in repaying your student loans is figuring out what you owe, and to whom. If you have various student loans, you might want to consolidate them to make repayment easier. That will lift your rate about one-eighth of 1%—but save a lot of annoyance in making multiple payments.

And if you set up an automatic repayment plan, deducting monthly payments from your bank account, you can save a quarter of a point in interest. Just make sure you don’t consolidate an older loan with a lower lifetime rate into the consolidation loan.

How do you find your federal student loans? Just go to That’s the database of all federal student loans, so you have no excuse for "forgetting" one of the loans you have.

If you have private student loans, made directly from banks, they likely carry higher rates. Those private lenders are not inclined to do you any favors by lowering the rates in a consolidation process. While almost anyone can consolidate a federal student loan, the banks and credit unions that hold your private loans require a good credit score and income before considering a consolidation.

Repayment Choices

  • Standard Repayment: The standard repayment program is a ten-year plan that will cost you the least in the long run. You’ll pay the current repayment rate, less a quarter-point discount for automatic payments.
  • Extended Repayment: One way to make the monthly bill a bit easier on your wallet is to extend the term of the loan for up to 25 years. But that will result in a total repayment that is much higher because of the additional interest you pay over the years.
  • Graduated Repayment: This plan starts with lower payments that rise every two years over the ten-year life of the loan. If you have more than $30,000 in loans, you can stretch out the graduated payments over 25 years. If you start earning more, you can adjust your payment plan annually. Again, you’ll pay more interest over the years by stretching out your payments.
  • Income-Based Repayment: This is a relatively new program and you can learn more at In this plan, the government checks your annual income, the size of your family and the total amount you owe—and then they come up with a repayment plan they figure will be affordable for you. Your payment will be readjusted annually, based on your situation. The government is in the process of making it easier to qualify for this program, so this should be your first stop if you don’t have a job. With no income, you have no payments—although interest will continue to accrue. Some of the interest may be subsidized.
  • Public Service Loan Forgiveness: In addition to the programs above, if you make 120 payments (10 years) on time—and if you work full-time in a public service job, such as government at the federal or state level, or at a qualifying non-profit agency, or in the military or public health fields, your loan balance will be forgiven at the end of this period. This provision can be used in conjunction with the extended, graduated, or income-based repayment plans.
  • Deferment or Forbearance: These are the two oldest programs for dealing with a situation in which you absolutely cannot repay your loans after graduation. They postpone, but do not eliminate, your obligation—and the interest continues to grow.

Even for college graduates, these choices can be overwhelming. And they have long-term consequences, so it’s worthwhile to get it right.

There are some good resources for help in setting up your repayment plan. The NSLDS Web site offers “Loan Exit” counseling online. Or you can go to or call them at 1-800-4-FED-AID (1-800-433-3243) where you can contact counselors who will help you through the process over the phone. And to see the impact of these plans on your monthly payments and total outlay, go to

Start the process now, well before the six-month post-graduation grace period ends. Remember that if you have a windfall—a signing bonus for that new job, or an unexpected raise along the way, you can always make extra payments and pay off your loan early—saving a lot of interest.

And finally, be aware that you can duck this obligation for a while, but you can’t hide from the federal government forever. If you don’t repay your student loans, your income tax refunds—and even your Social Security checks—will eventually be taken to repay your student loan debt. That’s the Savage Truth.

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