Question: I am 26 years old and recently graduated from grad school. I have about $28,000 of loan debt, from both undergrad and grad school. My deferment is up next month, and without changing or consolidating anything, I will owe more than $500/month. I work for a non-profit and cannot make that high of a payment. I know I have some options for repayment and consolidation. I qualify for the special direct consolidation, which, as I understand, will not reduce my monthly payment by much. Since I owe less than $30,000, I can’t extend my repayment. However, I will end up paying less interest in the end.
If I do a “regular” consolidation, I can change my repayment plan, including extending it. My monthly payments will be less, but I will end up paying a lot more interest and expanding the lifetime of my loans. (Not appealing.) I am trying to figure out the best option. I can also do an income dependent plan, which will lower my monthly charge but also increase interest.
Any advice or suggestions are welcome. I am trying to find a balance where I am paying what I can afford each month, but not extending my loans so much that I am paying an absurd amount of interest. Elisa, Bozeman, MT
Answer: Here is one approach to consider: Lower your monthly payment now and get more aggressive later, so you don’t increase the total amount you pay for your education — or at least not by much.
The key to the strategy is to think about your job and career over a long period of time. Many graduates in your circumstances aren’t making much at the moment but will do well over the years. In that case, extending the life of the loan or going with the income-based repayment option or the contingent income choice is a smart move. (And if you don’t see many pay hikes in your chosen career, the income-based repayment plan is the best option.)
You’re paying a more reasonable amount on a monthly basis with any of these options. Since there is no prepayment penalty with student loans, you can always accelerate paying down principal — and do make sure the money goes toward reducing principal — when your job and career are doing better.
The trick with this strategy is to be disciplined about siphoning part of pay raises, bonus payments and extra sums of money that come your way in coming years toward your student loans. This way, you won’t incur a hike or much of an increase in the total tab for your education, even though you’ve taken advantage of the payment flexibility of student loans to buy yourself some financial relief today.
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