Many ways to repay college loans

Many college graduates leave school with hefty student loan debt.

Most of the nation’s college Class of 2015 just celebrated graduation, and most of those graduates are heading into the world carrying large debt loads.

The way those graduates manage their loan debt will have a huge impact on their finances — particularly their cash flow and credit rating — in ways that will make it either easier, or harder, to save money and borrow for things like cars and homes. There are many loan-repayment options, and those with loans need to research the choices as if they were studying for an important exam.

It can be a complex issue because there are many types of loans, and many repayment options. There are also plenty of scams out there, waiting to ensnare borrowers with false promises of debt reduction and loan consolidation. Those companies typically charge up-front fees, provide nothing in return, and eventually get shut down by the feds, only to have new ones pop up.

For federal student loans, there are a number of repayment options, depending upon the type of student loan (there are at least a dozen varieties) and who borrowed the money (the student or the parent). Multiple loans can be consolidated into one, but the process cannot be reversed and has pros and cons.

A good starting point for learning more is the U.S. Department of Education’s student aid website, studentaid.ed.gov. The “understanding repayment” and “repayment plans” areas of that website can lead a borrower through some of the many choices.

For federal loans, there are at least seven repayment plan options, starting with the basic 10-year, fixed-payment plan. Other options allow borrowers to stretch out the payments, start with lower payments that rise over time, or make payments based upon the borrower’s income. There are three different income-based repayment plans.

For those who became federal direct loan borrowers after Oct. 1, 2007, and received a disbursement after Oct. 1, 2011, for example, there’s the “pay as you earn” plan. That caps monthly payments at 10 percent of discretionary income, the payments change as income changes, and after 20 years of qualifying monthly payments (or 10 years for those in “public service” professions) any remaining balance is forgiven.

Here’s how that might work:

Discretionary income is considered to be what’s left after 150 percent of the federal poverty standard is subtracted from a person’s “adjusted gross income.” For South Carolina and all other states except Hawaii and Alaska, 150 percent of the federal poverty guideline for a single person this year is $17,655.

So, a single person with an AGI of $25,000 would be considered to have $7,345 in discretionary income. Under the pay-as-you-earn plan, their monthly payment would be one-twelfth of 10 percent of their annual discretionary income. If that borrower had $25,000 in qualifying federal student loan debt, their initial monthly payment on that plan would be about $61, compared to $288 under the standard fixed payment 10-year plan.

There are too many options and scenarios to discuss in detail here, but the Department of Education website, the Consumer Financial Protection Bureau website consumerfinance.gov and reputable private websites such as finaid.org can help sort through them. Not all loans qualify for all plans.

One thing to keep in mind is that, as with a mortgage, extending a loan over more years results in lower monthly payments, but higher total payments over the life of the loan because more interest will be paid. Of course, if some of the loan balance will be forgiven, that changes the equation.

According to the Consumer Financial Protection Bureau, two-thirds of graduates are finishing their bachelor’s degrees with debt that averages nearly $30,000. Nationally, student loan debt has topped $1.2 trillion, more than $100 billion of which is in default.

As with a mortgage, defaulting on a student loan can lead to ruined credit and still more debt, as fees and interest charges pile on. Unlike a mortgage, student loan debt in most cases sticks with the borrower even if they declare bankruptcy.

So pay those student loan bills, pay them on time, and keep good records. The CFPB spent two years collecting more than 28,000 public comments about the student loan process and holding hearings, and what they heard about borrowers’ interactions with loan servicers was not encouraging.

“At every stage of the process of paying back their student loans, borrowers have told us they are wrapped in mounds of red tape, particularly for private student loans,” CFPB Director Richard Cordray said Thursday at hearing on student loans. “From the beginning, when they first graduate and start making their initial payments, consumers can experience problems with payment posting, problems with attempted prepayments, and problems with partial rather than full payments.”

That’s one reason why it’s important for borrowers to keep good records, and know the rules. Setting up regular electronic payments from a bank account is one way to make sure the bills get paid on time.