Paying back your loans

- [Instructor] In previous videos, we've been talking about taking out loans to pay for college if you can't cover the cost through some combination of scholarships, Work-Study, and savings. But if you do end up taking out loans, it's important to discuss what comes next. Specifically, you have to pay these loans back at some point. So today, we're going to talk about that payback process and how you can make sure it's manageable. On that note, we're very, very lucky to have personal finance expert Beth Kobliner here with us today. Beth is on the President's Advisory Council on Financial Capability for Young Americans, and she is also the author of the book, "Get a Financial Life." So Beth, thanks so much for being here with us today. - [Beth] It's really great to be here. - [Instructor] All right, Beth, let's dive right in. Most students are worried about taking on too much debt for college. Are students really taking on that much debt, and if so, how can I as a student make sure that the debt I take on is manageable. - [Beth] Right, well the numbers can seem really scary. Most kids are taking on debt. 70% of kids who graduate from college these days do have student loans, and they're leaving school with about $30,000 in debt, both federal and private student loans. To some extent, taking on debt is unavoidable, but it's not an awful thing either because if you are able to get federal student loans, the interest rates are lower and you have more repayment options. And I think that's a key for a lot of people to be aware of. - [Instructor] Great, so let's talk about these loans, and if I'm a student who's gone through college and I'm about to graduate, I've taken federal loans, what do I need to know about the repayment process? - [Beth] The first thing you want to know is as you're about to repay your loans, when you have federal student loans, is you want to figure out how much you owe and to whom you owe it. You probably got a new federal loan each semester, and that interest rate is fixed, but then the next year when you get a new loan, that interest rate is also fixed. So you have a bunch of loans out there from many different years, often at several different interest rates. So, you want to see what's out there and see who you owe, and there's a good site, the National Student Loan Data System, nslds.ed.gov. You can click on financial aid review to find out what you owe and the company you need to pay, which is known as the loan servicer. - [Instructor] Got you, and that's because each of the times you take out a federal loan, it might not actually be from the same loan servicer? - [Beth] Correct, and the interest rate will be different, and the amount will be different. But one thing you can do is consolidate all your loans at that point, which is basically mush them all together through this program called Direct Consolidation Loan Program, and it allows you to make one payment each month at a fixed interest rate. And to get more information, you can go to studentaid.gov/consolidation. And the way consolidation loans work is, it's simply the average of the interest rate for the loans you're combining, rounded up a tiny bit. - [Instructor] Great, so the consolidation actually lets me take all of these different federal loans that I've taken over the course of maybe four years, put them all together into one loan that has an average of the different interest rates, and then I can pay that back with a single payment every month as opposed to making a bunch of different payments to different people. Is that right? - [Beth] That's right. And it's good because you limit your chance of risking missing a payment and getting into deep financial trouble, which really is of all of this probably one of the most important thing is you want to make your payments in a timely way. - [Instructor] All right, so we've been talking about repaying or consolidating loans, but I may graduate and not be able to find a job right away. So if that's the case, is there anything I can do, or am I out of luck? - [Beth] Well, the fact is, this is a realistic problem for a lot of young people. And the good news is for most federal student loans, you don't have to start paying them back actually until at least six months after graduating or leaving school. But even at that point, if you can't make the payments, maybe you can't find a job, or you've gone back to school, grad school, you should then apply for what's called a deferment, which lets you off the hook from paying back your loans for three years or more, among some other benefits it offers. If you don't qualify for a deferment, you may still get a break by applying for something called forbearance, which allows you to reduce or stop making those payments for up to 12 months at a time. That's less than deferment, but it's still a definitely helpful option. You'll want to check out studentaid.gov/deferment-forbearance to get the details. - [Instructor] Great, well it's wonderful to know that there is some flexibility out there if I can't begin immediately paying back those loans. But when I am ready to start paying them back, what exactly do I do? - [Beth] Right, so this is where it gets kind of interesting. You're automatically enrolled in the standard repayment plan, which basically requires that you make the same payment every month for 10 years until the whole loan is paid off. This is generally the least expensive option when it comes to paying back loans. But if you can't afford that, there are other repayment plans to choose from. And the best place to go to figure this all out is studentaid.gov/repayment-estimator. This is a really great source because you could just plug in your information to figure out which repayment plan really makes the most sense for you. - [Instructor] Great, well can you tell us a little bit more, since the standard plan is sort of the default that people are placed in, and as you said, if you can afford to do it, it tends to be the least expensive overall, can you kind of give us an example of how it would work? - [Beth] Absolutely, so with the standard repayment plan, you basically pay off your loan over 10 years. And let's take an example of a student named Gabe. He's a recent graduate, and say he owes $30,000 in Direct federal loans. So let's assume, I'm just making some assumptions here, his interest rate is 4.7%, which is the current rate for Direct loans. With the standard 10-year repayment plan, Gabe would owe $315 per month. So over 10 years, he would've had to pay back the $30,000 plus an additional $8,000 in interest. So his total cost of the loan is $38,000. Now remember, these are just rounded up numbers that we figured out, but it generally gives you a good idea of what that standard repayment plan would cost you. - [Instructor] Great, so I can get this sort of information on the repayment estimator. In addition to the standard repayment plan, what are some other options for Gabe if that $315 a month doesn't sound realistic, particularly right when he's graduating from college. - [Beth] Exactly, so there's several others. But remember, these are all for federal loans only. But one's called the graduated repayment plan, and this is good for people who can't afford that monthly payment of 315 per month, but they're pretty sure that their income is gonna increase over time. So with graduated repayment, payments start very low and manageable and then jump up a notch every two years until it's paid off in 10 years. The downside is you're gonna pay a little bit more interest over time. So in Gabe's case, with graduated repayment, he'd pay just $180 a month for the first two years, but $530 a month for the years nine and 10. So you compare that to the 315 Gabe would pay every month with standard repayment, and clearly it's less at the beginning and more at the end. So with graduated over 10 years, he'd pay back the $30,000 plus an additional $10,000 in interest, so his total cost for the graduated plan would be about $2,000 more than standard repayment, or the total cost for the graduated plan would be $40,000. - [Instructor] Got ya, so for that $30,000 loan, for Gabe it sounds like if he can afford the standard repayment plan upfront, he can save a little bit of money over the long-term, but if he needs the flexibility of low payments in the beginning, he can take the graduated plan and then pay a little bit more overall. - [Beth] That's exactly right. - [Instructor] Great, and are there any other options that Gabe should consider, particularly if he doesn't have a very large income at the start of his career after graduating from college? - [Beth] Right, well there are other plans called income-driven repayment plans, and they basically look at your income and how much money you owe to figure out whether you can make very, very low monthly payments at first based on your income if you have a low income. The thing about these income-based, these income-driven plans is that after a set number of years, your debt is actually forgiven, which is a good thing. But realistically, the best way to think about these plans is that they're a temporary option to help you while you're young and really not making very much money, but as your salary grows over time, you're probably gonna have to switch back to the standard repayment plan. - [Instructor] Great, and that makes a lot of sense. And so, speaking of income, there are obviously some career paths, particularly ones that focus on public service, that tend to pay less. How does that factor in to taking out college loans, and are there any options to sort of help people who decide to go into those sort of professions? - [Beth] Right, so, if you are a do-gooder or somebody who just wants to help others, there's a program called Public Service Loan Forgiveness that you have to look into. Because it could be really advantageous in that it completely wipes away your remaining debt after 10 years. But to be eligible, you need to commit to a long-term job or career in teaching, public health, law enforcement, military, and you have to do so for 10 years. So with this plan, the strategy would be, if you're going into public service, you'd want your monthly payments for the first 10 years to be rather low so you're not paying so much upfront, and then after the 10th year, if you owe a lot, the good news is, with this kind of program, those debts are forgiven, which is really a great, great thing for somebody who has really committed themselves to public service. If you're doing public service but you're not committing for 10 years, fewer than 10 years, say you're going to the Peace Corps or AmeriCorps or teaching in a low-income area or the military, there are other student loan forgiveness programs. You can check out studentaid.gov/forgiveness, and you can get a sense for what your options would be. - [Instructor] Great, so it sounds like there really is some flexibility for folks who decide to take paths that maybe don't pay as much as far as student loan repayment is concerned. - [Beth] Right, don't pay as much and help others, which is sort of a nice thing that there's some payback there. - [Instructor] Great, and Beth, the last question I want to ask you is I've heard that there are some potential tax breaks for students who are paying back their loans that I should be aware about as I'm graduating from college and starting to repay my loans. - [Beth] Right, well probably the most important is you may be able to deduct up to $2,500 of the interest you pay on your student loans each year. And that would be on your taxes, on your tax return. So it definitely is worth checking it out. - [Instructor] Great, well Beth, thank you so much for taking the time with us today to talk about student loan repayments, and we really appreciate your time. - [Beth] Oh, thank you so much.