Student loan debt has made headlines of late as the potential new bubble, overshadowing even the venerable American burden of credit card balances.
U.S. student loan debt from private sources and federal programs hit $1 trillion over the past several months, the Consumer Financial Protection Bureau announced last week.
The new U.S. agency overseeing most loan products made that estimate after the “first major effort” to analyze the private student loan market, which falls under the bureau’s new authority.
Consumer Reports reminds students and parents that there are ways to manage federal student debt through various repayment options.
These apply to federally backed loans – which include Perkins and Stafford loans and Direct PLUS loans (usually taken out by parents) – that usually must be repaid six months after the borrower finishes school or drops below half-time status.
There are various repayment options based on the type of loan initiated by the more than 36 million borrowers with federal student debt.
The average college student has eight to 12 loans for his undergraduate education.
Consumer Reports urges all borrowers to carefully determine the their precise student loan types, the loan servicers, balances, interest rates, repayment options, and grace periods.
You might have a combination of private loans and federally backed loans. You can to the National Student Loan Data System, a database of federal loans, for assistance.
Consumer Reports said reminds borrowers should pay off your highest-interest loans as quickly as possible to get out of debt faster. Make the largest payments you can afford each month and applying extra to the principal.
“If your total debt exceeds your first-year income after graduation, you probably won’t be able to afford payments under the standard 10-year repayment plan,” CR said.
Consumer Reports gives these repayment options, “which result in smaller, more affordable monthly payments”:
- Graduated repayment. Payments start small and increase every two years, which could be a good option for those who expect their income to increase steadily over time, such as some physicians.
- Extended repayment. If you’re at least $30,000 in debt and didn’t have a loan before Oct. 7, 1998, you can choose this option, which gives you up to 25 years to repay your loans. You can choose fixed or graduated payments.
- Income-contingent repayment. Your payments are calculated annually on the basis of your adjusted gross income (plus your spouse’s income if you’re married), family size, and the total amount of Direct loans over a 25-year maximum repayment schedule. After 25 years of payments, any unpaid balance will be discharged, but you might have to pay taxes on it. This option is for Direct loans only.
- Income-based repayment. Monthly payment is based on your income (and your spouse’s if you file together) and family size, and is adjusted annually. Last fall, President Obama made a proposal to improve this type of payment for many borrowers sooner than the current program will do under an initiative called Pay As You Earn. The current program caps monthly payments at 15 percent of adjusted gross income and forgives remaining loan balances after 25 years. Pay As You Earn would cap monthly payments at 10 percent of adjusted gross income for some borrowers and forgive remaining loan balances after 20 years, but they might have to pay taxes on the discharged debt. The Department of Education says the new rules would apply to borrowers who took out their first federal loan in 2008 or later, but borrowers must also take out a new loan in 2012 or later to be eligible.