Â It’s not the billions received by AIG and the car companies, but at least it’s something
The following is a guest post by Emily, a 20-something single gal who writes about navigating her way through her finances and the world, at Musings and Ruminations of a Single Gal.
Like so many other graduate students, I’m facing the probability of an enormous amount of student loan debt (upwards of $100,000 in my case, since I’m a law student) and not such a large starting salary. While it is possible for some law grads to start out with a six-figure salary, those grads are usually the exception and not the rule. In this economy, where big law firms are laying off lawyers by the hundreds and deferring new hires, the prospect of a six-figure starting salary is even less likely.
This debt load is enough to make anyone anxious, stressed, and overwhelmed. Most of the time I try not to think about it and focus on the present, but that’s not always easy. Luckily, as of July 1, 2009 people like me will have reason to celebrate (at least somewhat). On that date, the Federal Government is implementing a new repayment option, Income-Based Repayment (IBR), and a low interest rate for loan consolidation.
Income-Based Repayment — What is It?
IBR works differently than the previous option of Income-Contingent Repayment (ICR). While both IBR and ICR base monthly payments on a percentage of discretionary income, IBR defines discretionary income differently and requires a smaller percentage. IBR caps monthly payments at 15% of the amount by which adjusted gross income exceeds 150% of the poverty line. Here is an example of the calculation for a single person:
.15% *[(AGI — 150% Poverty Line)/12] = Maximum amount of monthly loan repayment under IBR
Adjusted Gross Income: $40,000
2009 Poverty Line in US: $10,830
150% of Poverty Line: $16,245
.15%*[($40,000.00 – $16,245)/12] = $296.94
Under the IBR plan a person making $40,000/year would only be required to make a monthly loan payment of $296.94. The payment would be adjusted each year based on federal income tax returns filed by the individual.
IBR is available to both direct loan program participants and the federally backed loan programs.
Other Great News About IBR
- During the first 3 years of IBR, the federal government will pay the unpaid interest on subsidized loans. This is because the monthly payment could be less than the amount of interest accumulating.
- Remaining debt is forgiven after 25 years (regardless of where you are employed).
- If you work full-time in a public service career, the remaining debt is forgiven after 10 years.
Interest Rates Also Set to Drop — Time to Consolidate
The other exciting change scheduled for July 1, 2009 is the annual interest rate adjustment.Now is excellent time to consolidate student loans — especially those that were borrowed with variable interest rates before 2006. Loans having a fixed interest rate, including all borrowed after 2006, are not affected by this change. The interest rate for variable rate loans will be reduced to 2.00-3.38%, depending on the type of loan. You can check out the Loan Consolidation website run by the Federal Government for more information:
When you consolidate your loans you lock in a new lower rate. Even those loans borrowed after 2006 can be consolidated with the earlier loans. Although those loans won’t yield the 2.00-3.38% interest rates, they will lead to an overall reduction in interest rates because the Federal Government will use a weighted average in calculating the interest rate. The rate cannot exceed 8.25% and is fixed for the life of the loan. The federal Loan Consolidation website has information on calculating the weighted average.
Here is a simplistic example of the savings. I have left the current interest rate the same on all loans (which is unrealistic given that those before 2006 would be variable) and have chosen a standard 15 year repayment.
John Doe currently has the following loans:
2003-2004: Undergrad year 1, Stafford loan: $2,625 @ 6.8%
2004-2005: Undergrad year 2, Stafford loan: $3,500 @ 6.8%
2005-2006: Undergrad year 3, Stafford loan: $5,500 @ 6.8%
2006-2007: Undergrad year 4, Stafford loan: $5,500 @ 6.8%
Total: $17,125 @ 6.8%
Without consolidating he will be required to make 4 separate payments per month (if the loans are held by different servicing companies) totaling $152.02 per month for 15 years. His total interest costs will be $10,237.31.
Until 2006, the interest rates were variable rates and they are eligible to be locked in at anywhere from 2.00-3.38%. This example will assume John Doe’s loans from 2003 to 2006 would be eligible for the 2.00% interest rate (for the sake of simpler calculations). The actual determination of the interest rate for consolidation depends on numerous factors such as the types of loans you have and whether you have entered repayment. John Doe’s loan for 2006-2007 would remain at 6.8% because the loans were no longer variable interest rate loans. Consolidating these loans will produce an overall interest rate of 3.625%.
2003-2004: Undergrad year 1, Stafford loan: $2,625 @ 2.0%
2004-2005: Undergrad year 2, Stafford loan: $3,500 @ 2.0%
2005-2006: Undergrad year 3, Stafford loan: $5,500 @ 2.0%
2006-2007: Undergrad year 4, Stafford loan: $5,500 @ 6.8%
Total after consolidation: $17,125 @ 3.625%
If John consolidates his loans, his monthly payment would total $123.48 for 15 years. That is a monthly savings of $28.54. John will only have to pay one loan servicing company (rather than 4 separate payments) and he will only pay $5,100.81 in total interest — a $5,136.50 savings!
You can submit your application for consolidation at anytime. Loan consolidation applications that are submitted now are placed on hold until July 1, 2009, when processing will resume with the new lower interest rates. The processing of your consolidation application will generally take 60 — 90 days. This is what you need to know to begin the consolidation application process:
You need information regarding all of your student loans, even if they are not federally backed. Although the consolidation application will not allow you to consolidate non-federal loans it still requires information concerning total debt load.
The requisite information includes:
Â§ The contact information for all loan servicing companies
Â§ The interest rates for all your loans
Â§ The principle amount of all your loans
Â§ Your Federal Student Aid PIN (the same one that is used in completing the Free Application for Federal Student Aid “FAFSA”)
Student loan consolidation is a good thing to look into. While it may not be for everyone, it could end up saving you a lot of money in the long run. All information (and the application for consolidation) can be found at the Federal Government’s website.
Disclaimer: The content of this article is for general information and does not constitute advice. While the author has written from both personal experience and research that was both true and accurate at the time of writing, she gives no assurance or warranty regarding the accuracy or applicability of any of the contents. The author of this post and the website accept no responsibility for and excludes all liability in connection with utilizing the above information. Complete and current information on student loan consolidation can be found by visiting http://www.loanconsolidation.ed.gov/.