Higher Math: Repaying Student Loans

Graduates all over the country are packing up, listening to some boring commencement speeches, going to a final round of parties, and entering the working world with a real adult burden - an average of $11,000 in college loans.

In the frenzy of entering the real world, it’s easy to overlook loanrepayment options that can dramatically cut your monthly payments or reduce the amount of interest you pay over the life of the loan.

The choices that follow are offered by Sallie Mae, the quasigovernmental student lender, but other lenders may be equally flexible. Sallie Mae’s Select Your Terms program allows borrowers to switch among repayment plans whenever they want without a fee.

The basic repayment schedule, called a Standard Repayment Account at Sallie Mae, requires the borrower to make 120 equal, or “level,” monthly payments. A borrower who owes $10,000 at the current interest rate of 8.25 percent pays about $123 a month. Over 10 years that totals about $14,700.

A second option, the Select Step Account, allows the borrower to make smaller, interest-only payments of about $69 a month for the first two years. In years three through 10, the payments would be $143 per month. Total payments over 10 years would be $15,350 - $650 more than with level payments.

The borrower could also opt for a Select Step Account with interestonly payments of $69 for “four” years. In the last six years, payments would jump to $177 per month. Total payments over 10 years would be about $16,000, or $1,300 more than with level payments.

Finally, the borrower can select an Income Sensitive Repayment Account that allows the borrower to set monthly payments at anywhere from 4 percent to 25 percent of gross monthly income. This plan also allows you to extend the term of the loan by as much as five years. Of course, the lower the payment and longer the term, the more you pay in interest over the life of the loan.

Borrowers using Sallie Mae’s Stafford Loan who make their first 48 payments on time automatically have their interest rates reduced 2 percentage points for the remaining term of the loan. You can have your interest rate reduced an additional 1/4 point by having your monthly payment drawn automatically from your checking or savings account.

As the figures show, paying less in the short run means paying more in the long run, but this can be a good tradeoff for someone who’s just starting off with a beginner’s wages. And, of course, the difference in monthly payments would be more dramatic for bigger loans.

Graduates who can afford it, however, should consider going the other way and paying off their loans early, either with bigger monthly payments or a lump sum.

For one thing, carrying this debt will make it harder to obtain a car loan, mortgage or other loan.

Paying off an 8.25 percent student loan early means, in effect, earning an 8.25 percent return. That’s a lot better than you’d earn with a savings account. You might do better in the stock market, but paying off a loan brings a guaranteed return with no risk. Sallie Mae loans can be paid off early without penalty.

Of course, it’s always better to first repay the loans with the highest interest rate, which in most cases is a credit-card balance.

xxxx