Handling Expensive Student Loans

As you already know, college education can get pretty expensive. Add on fees, room, board, supplies and transportation, and you can easily spend $25,000 to over $100,000 a year! Unfortunately, most of us cannot afford to pay these kinds of tuitions without some help. That is exactly the purpose of the Direct Loan Program of the Department of Education. Through it, you can receive payment-deferred student loans that you do not have to start paying back until you have completed your education. 

In the past, multiple providers of student loans competed for business, but all were guaranteed by the federal government. Students could end up with two, three or more different student loans, all at varying interest rates and terms. Congress changed the law in 2010 so that from now on, all federal student loans originate from the Direct Loan Program. While this is great for new students, older ones may be saddled with multiple checks they must write each month to multiple loan programs.

A better solution is to consolidate federal student loans. The Department of Education has various programs to consolidate federal student loans, so that you only have to write one check a month for a fixed amount. The highest interest rate you will ever pay is 8.25 percent, as mandated by law. Your actual interest rate will be calculated as the weighted average of the interest rates on your outstanding loans. When you consolidate federal student loans, you are subject to a fixed interest rate, never a variable rate.

There are financial repayment plans that help former students having a partial financial hardship. The Department of Education defines this as a condition in which the sum of all eligible student loan payment, as per a standard 10-year repayment plan, exceeds your discretionary income, defined as 15 percent of the difference between your adjusted gross income and 150 percent of the poverty line for your state and family size. If you are experiencing a partial financial hardship, you can apply for the Income-Based Repayment Plan (IBR). This plan caps your payments at 15 percent of your discretionary income.

You can use IBR to consolidate federal student loans, as long as they are not PLUS loans made to parent borrowers. To participate in the IBR, you must authorize the Internal Revenue Service to inform the Department of Education as to your adjusted gross income. 

Eric Bank, Freelance Writer

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