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Barbara

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Does your current (or future) federal student loan payment seem a bit daunting? As of July 1, there's a new repayment option for federal student loans that may help.

Income Based Repayment  (IBR) is designed to help borrowers who find that their current income makes the required payments with a standard repayment term difficult to afford.

Here's how it works:

Loan eligibility: IBR is available for the Federal Stafford Loans, Federal PLUS Loans for graduate and professional students, and Federal Consolidation Loans, either with Direct Loans or a private lender like Wells Fargo through the Federal Family Education Loan Program (FFELP). However, there are a couple of exceptions: The loan cannot be in default, and IBR is not available for Federal PLUS Loans for parents or Federal Consolidation Loans that repaid a Federal PLUS Loan for parents.

Payment calculation: Through IBR, borrowers' monthly payments are calculated by taking into consideration their adjusted gross income , family size, and the state where they reside. If the IBR payment is less than the payment under a 10-year standard repayment plan, then the borrower is eligible for IBR. To see if you may qualify, calculate the payment with Income Based Repayment  and compare the payment with Standard Repayment.

How to apply: If you find that your payment with IBR may be lower than with a standard repayment period, you can apply for IBR directly through your lender. If your loan is with Wells Fargo, you can call 1-800-658-3567.

Now that you know how it works, here are some considerations for you:

Added benefits: A more manageable student loan payment is a big deal, but there are a couple other benefits of IBR. If you make qualifying payments on your loan under Income Based Repayment for 25 years, you may be able to have any remaining balance discharged. Also, if you have a subsidized loan and your IBR payment doesn't cover the monthly interest your loan accrues, that unpaid interest will be subsidized by the government for up to three consecutive years from when you first enter IBR repayment.

Possible drawbacks: Remember to consider the cons of IBR as well. A reduced payment through IBR usually means you're taking more time to pay off your loan, which can mean paying more interest over the life of the loan. Borrowers must also submit necessary paperwork each year to continue with IBR. And if you are no longer eligible for IBR, any unpaid interest that has accrued on your loan is capitalized (added to the principal balance) and will be charged interest.

Anyone have additional questions on Income Based Repayment? Leave them here!

Staci

Last week Barbara laid out a number of options for borrowers to extend or postpone student loan repayment — important information for new grads to have as they enter the real world. This is a topic that we get lots of questions on — probably second only to how to lower student loan interest rates.

But I'm going to play devil's advocate  here, because I think it's important for you to consider another perspective. I'm going to tell you not to take advantage of these options unless you absolutely have to.

Michelle Singletary, one of my most favorite and down-to-earth personal finance columnists with The Washington Post , had this to say about extended student loan repayment in a piece published on May 17, 2009:

But can I give you some hard but well-meaning advice if you're one of the many graduates saddled with student loans?

Instead of immediately opting for repayment plans that will stretch your payments out until you're in middle age, try to find other ways to handle this debt.

I know these are tough times. Nonetheless start your loan repayment as soon as possible, even if it means taking a second job, or a roommate (or two or three), or yes, dare I say, moving back home for several years.

You could handle this debt if you delay going on to graduate school, which would only pile on even more debt. If you are going to have trouble finding a job to make the monthly payments on your undergraduate debt, how in the world are you going to find employment to service tens of thousands more as a result of an advanced degree? Trust me, an advanced degree doesn't guarantee a big salary.

You don't get to buy a new car, an upgraded wardrobe, waste your money on liquor at happy hours, or take vacations until this debt is extinguished.

And don't look at me with that face. Only after you've exhaustively scanned your budget and cut every possible expense (such as deleting the texting option on your mobile phone) should you consider extended repayment options.

Tough love from Michelle, but her advice is spot-on. Here's how she ends her column:

I've met an incredible number of people -- too many -- who really could have paid their student loans under the standard payback period but because they didn't want to live frugally, saw their loan balances jump significantly over the years.

If you truly can't afford to fully pay what you owe, take advantage of the extra breathing room. But remember the more you delay, the more you may pay.

Something to think about.

Barbara

We already talked about ways you could possibly lower your monthly student loan obligations. But if you're looking for a way to postpone your student loan payments, there may be an option for you as well.

Under certain circumstances, borrowers may be eligible for a deferment or be granted a forbearance. Now, in both cases, you aren't required to make payments to your student loan for a short period of time. However, there are some differences that are important to understand. I'll give you the scoop on each:

• Deferments: These are for federal student loans. There are several types of deferments for folks in different situations.  You need to meet the criteria of these situations in order to be eligible for the deferment. If you are granted a deferment, know that in most cases, you’ll still be accruing interest. (The exception is for subsidized Federal Stafford Loans, which are based on financial need — the interest accrued during deferment for those loans is paid by the government.) If you don’t qualify for a deferment, you may be able to postpone payments with a forbearance.
• Forbearances: Forbearances are available for both federal and private student loans. These are granted at the discretion of your lender. Interest will continue to accrue on your loan during forbearance (even for the subsidized Federal Stafford Loan). Federal forbearances are available for borrowers experiencing financial hardship and other situations. Private student loan forbearances vary by lender, so ask your lender what options are available for you.

If you're having difficulties repaying your loan, it's very important to talk with your lender about options and the paperwork you'll need to apply for them. You don't want to fall behind on payments, and a deferment or forbearance could help.

Barbara

Folks, we've made it through another graduation season. The gowns and mortar boards are packed away, and now many graduates are focused on their finances during the first months out of college. Student loan repayment is just down the road.

As you look ahead to that first student loan payment, you may be realizing that it's going to be a little tough to swing. You may have borrowed more than you can afford to repay or may not have secured employment quite yet. (Side note for those of you just starting to take out student loans: Make sure you budget properly so you don't borrow more than you can repay.)

Whatever your situation, there are options available to help make it easier to pay your student loan. Here are some ways you may be able to lower your interest rate or monthly payments:

• Choose a different repayment plan. For federal loans, there are a number of repayment plans other than the standard repayment plan. You may be able to have your payment based on your income, extend your repayment if you have over $25,000 in federal loans, or start out with smaller payments that gradually get larger over the repayment term. And check with your lender to see what repayment options are available for your private student loans.
• Take advantage of discounts from you lender. Ask your lender if there are any interest rate discounts available for your loan. For example, you may be able to save money if you have your monthly student loan payment automatically deducted from your checking or savings account.
• Consolidate your loans. By combining your federal student loans  together into a new loan with a longer repayment period, you'll usually lower your monthly payment. For private student loans you may even find that your interest rate is lower if your credit situation has improved or if you bring on a cosigner with excellent credit.

Remember that if you're lowering your monthly payment by extending your repayment period or paying just the interest, you may end up paying more interest over the life of your loan. However, in the grand scheme of things, if it prevents you from missing payments and defaulting on your student loan, it might be worth it.

Looking for a way to postpone your student loan payment? We'll talk about deferments and forbearances later this week, so stay tuned!

Meanwhile, hit me up with any questions you have about different repayment options.

Barbara

Each year my hometown newspaper does a special feature at graduation time. Now, keep in mind that I'm from a town of about 1,200 people.  The paper publishes all the high school graduates' photos and includes their activities and honors, as well as their future plans.

As I read about the class of 2009, I had some interesting reactions: First (since I remember the birth of many of the graduates), am I really that old?

After that shock wore off, I started reading their future plans. To be honest, I got a little judgmental. So-and-so is going to a technical college to learn a trade. "Good for them," I thought, "saving money and getting the education you need." So-and-so is going to study elementary education at an expensive private school. "Well, that's not a smart choice," I thought, "probably over-borrowing considering their chosen field."

Obviously, there is much to consider when you're choosing your college.  You want to make sure that you'll feel comfortable on campus, that it's the right size, the right distance from home, etc. However, you also should make sure you're in the right price range for the degree you want to get.

Of course, there are some reasons you may want to attend a more expensive school that make perfect sense — like if your chosen program is one of the best around or if you were awarded a better scholarship package.

But if you're going to be borrowing $30,000 annually for four years to end up with a degree and a job that pays a maximum of $30,000, you might want to think again — and consider a lower-cost option.

How did cost fit into your college choice?

Staci

You might not have noticed, but at the end of April we added a toll-free phone number to the Student LoanDown blog: 1-877-412-5321.

In the age of social networking and Twitter  — which, BTW, Wells Fargo is using  — why would we include something as archaic as a phone number? After all, I'm the first to admit that I generally go out of my way to avoid making a phone call. If it's something I can solve by looking up the answer online or sending an email, that's the route for me.

But education financing can be complicated, frustrating, and even a bit emotional. And when you're trying to figure out how much to borrow for school — or if you should even borrow at all — sometimes it can help to talk things through with a real, live person. Our student loan specialists are here to help.

Of course, you can continue to comment on posts, or send us emails, or use our Ask the Expert tool. You have options!

Later this year we're going to give ourselves a bit of a facelift, and we're planning on adding some additional features, too. If you have suggestions for what you'd like to see, please send 'em our way!

Barbara

We all strive to be above average in some of the things we do. Scholars are hoping to surpass the average grades, athletes are striving for higher than average statistics, you get the picture.

Yet we tend to settle on being average in other arenas. And, yes, sometimes it's just fine to run with the pack as just your average Joe or Jane.  But there is one area that you should never find comfort in being average — your finances.

Why not? I can tell you from personal experience that finding comfort in being average can come back to bite you!

When I graduated from college, a little over $2,000 on a college credit card followed me into the real world. Now for someone who had a scholarship to cover college expenses that seems a bit high, right?

Well, here's the deal. Looking into some credit card facts  I kept hearing over and over that the average college student graduates with over $2,000 in credit card debt. So I thought, "What the heck?" If my counterparts are dealing with the same situation, I can charge a few things, too.

However, when we get stuck thinking that the debt is inevitable, we become less conscious of how much we are spending on things we don't really need. Part of that $2,000 on my credit card was for an iPod, and be sure that I whipped out the plastic for a pair of shoes or two (or three...).

So in the end, thinking average college debt was OK helped me develop some pretty bad spending habits. And unfortunately, those habits stuck with me until I started working for a bank and talking about financial education!

I challenge you to be better than average when it comes to your finances — both during college and after. Think twice about charging that sweatshirt at the campus bookstore. Resist ordering a pizza for dinner when you could use your pre-paid meal plan at the campus cafeteria.

Don't fall into the average trap with your student loans, either (the average for student loan debt is almost $20,000 ). Consider a part-time job to supplement your living expenses rather than taking out more student loans. Pay your interest during school to avoid capitalization.

Each tiny step will put you leaps and bounds in front of the students who settle for "average."

Staci

Here at the Student LoanDown, we like to think that every month is financial literacy month. But this April, it actually is National Financial Literacy Month!  Time to brush up on your financial fundamentals!

One of the personal finance bloggers we follow regularly, J.D. from Get Rich Slowly, asked his readers what they want to learn during Financial Literacy Month.  They've been more than forthcoming with interesting suggestions — some even want to know more about student loans.

You've been asking some interesting questions lately, too. In case you've missed them, I thought I'd highlight some of our recent exchanges:

• Do you have questions about student loan default or federal student loan rehabilitation? Check out the comment string on my post about student loan repayment.
• Are you thinking about cosigning a private student loan for a student and wondering how long you'll be on the hook?
• Want to know more about how Wells Fargo's private student loan interest rates are calculated? Barbara answers Tyler's questions here.
• If you're curious about student loan consolidation, our most popular post probably addresses the topic somewhere in the comments section!

What haven't we discussed that you'd like to know? You don't have to wait for Financial Literacy Month to roll around — you can ask us anytime.

Caroline

If you're a high school senior, Decision Day is almost here. You're getting to the point where you should be receiving your award letters  from colleges.

If you haven't already decided on a school, these award letters are probably a big part of what you've been waiting for. For many students, school choice comes down to the financial aid package.

So what can you expect? Your award letter typically will list the Cost of Attendance (COA), the federal aid you're eligible for (grants, work-study, and student loans), and your Expected Family Contribution (EFC).

Review your award letters carefully, considering these important points  to be sure you understand the aid that's being granted and what your final costs will be.

The link above lists some key questions to ask, such as:

• Does the Cost of Attendance include all projected costs?
• How do non-institutional scholarships affect you award amount?
• Does the aid package likely cover the same expenses every year?

When it comes to award letters, they're not all written in the same format, so here's a cool tool  to help you compare apples to apples. Don't be afraid to contact the school to get all your questions answered.

Are you waiting for an award letter before deciding on a school?

Barbara

One of the questions we Student LoanDown bloggers get asked frequently (through comments and our Ask the Expert tool) is, "Can I lower my student loan interest rate?"

Some folks are looking to lower their monthly payment because they're not able to afford it — others are just looking to decrease the total interest paid to their lender. Here's the information I usually pass on to those readers.

When student loan borrowers sign their promissory note  agreeing to pay back the loan, they also agree to the interest rate detailed in the contract. For some loans this will be fixed and for others it will be variable (a margin that is added to a base rate). For federal student loans made after July 1, 2006, the interest rate is fixed. Most private student loans have variable interest rates.

Your promissory note locks in the terms on your loan (including the interest rate or rate margin). You can't "refinance" a student loan the way you can with other consumer credit products, but there are options to possibly lower your current monthly payment, reduce your interest rate, or reduce the amount you pay over the life of the loan.

Quick tangent: For those of you still in school or just beginning to take out student loans, be proactive. Understand what you're borrowing at what rate, so you don't find yourself unable to make payments later. End tangent.

Now, let's talk about the options.

Consolidate: By consolidating your student loans, you may end up reducing your current monthly payment because you are likely extending your repayment period. However, that means you would end up paying more over the life of the loan if you continue paying just the required amount each month. But if you're looking for a little payment relief now and are willing to pay more (or make higher payments later to avoid accruing additional interest), consolidation could be the answer. Your best bet for federal student loan consolidation is through the Department of Education's Direct Loan Program. 

An added benefit of private student loan consolidation is a possible interest rate change. If your credit situation has improved since you took out your loan (or if you bring on a cosigner), you may qualify for a better interest rate than you previously had.

Pay off the debt: Some borrowers could consider using a different consumer loan (personal, home equity, etc., depending on assets) to pay off their student loan. This option has a couple big things to consider, though. You would lose several benefits of student loans like deferment and forbearance options, as well as the potential tax deduction.

Pay more: If what you're looking to do is accrue less interest, then the best solution is to pay more money each month toward your principal balance. Even just a little bit each month could add up to big savings over the life of your loan.

Get the debt forgiven: There are some programs that will forgive a certain amount of a student's debt. For example, there is a federal loan forgiveness option available to students working in public service. 

Use borrower benefits: Ask you lender if they offer any benefits that could reduce your interest rate. For example, some lenders offer a discount if you make your payment automatically.

What other questions do you have about your student loans?