I knew I wanted to attack student loan debt after graduation. But what I soon came to realize is that I didn’t even have a grasp on the basics. How much money is owed? Who is it owed to? What’s the difference between these loan types? How quickly is the interest accruing on it?
So prior to devising a strategy to tackling loans, I felt it necessary to understand exactly what loans had been taken out so many years ago. Below is a breakdown of the current loan situation and their respective interest accrual percentages (at the time of composing this post):
Federal Direct Subsidized Stafford Loan
Federal Direct Unsubsidized Loan
Federal Direct PLUS Loan
Total Current Balance: $524,556.21
What’s the difference?
Here is a quick rundown of the basics:
Federal Direct Unsubsidized Loans: most common dental school loan; annual borrowing limit of $40,500 per year (only applies to dental/medical student), with cumulative max of $224,000.
Federal Direct Subsidized Loans: government covers interest while in school; typically for students who demonstrate financial need
Federal Direct PLUS Loans: used to supplement educational expenses that are not covered by other financial aid up to cost of attendance each year; typically offered at a higher interest rate.
What does it mean for repayment?
From what I gather, the type of student loan matters most during the initial application period (in regards to maximum borrowing limits and interest rates). Ultimately, the loans must be paid.
There are a number of repayment options offered by the U.S. Department of Education for federal direct loans. In total, there are numerous repayment options: THREE basic and FOUR income-driven repayment plans. While most plans are designed for borrowers of direct subsidized and unsubsidized student loans as well as direct PLUS loans, each plan varies according to monthly time frames and payment amount. Additionally, eligibility for income-driven plans depend on debt-to-income ratios.
Basic Federal Repayment Plans
Basic plans do not depend on income and are as follows: Standard, Graduated and Extended. The standard and graduated plans hold 10-30 year terms. The former with fixed rates and the latter with rates which increase after the first 2 years. Extended plan holds up to a 25-year term with either fixed or graduated monthly rates but more interest paid at the end of the term.
Income-Driven Repayment Plans
These plans set monthly payments at a percentage of discretionary income (10-15%) and provide terms of 20 to 25 years. What’s often most attractive about these plans is the potential for loan forgiveness at the end of the repayment term. While these plans allow for much lower monthly payments, borrowers will typically pay more interest over time. Additionally, borrowers are responsible for the income tax on the loan forgiveness amount at the end of their 20-25-year term and must actually qualify/apply for income-drive repayment plans every year.
Putting it all together.
In my initial attempt at understanding my loans, I immediately recognized a couple of important factors. The first being the interest rates associated with each of the loan amounts varied somewhat substantially; they ranged from 7.9% for most Federal Direct PLUS loans to as low as 5.41% for Federal Direct Unsubsidized loans. The weighted average interest rate for our loans is approximately 7.15%. As can be seen in the graphic below, for the life of the loan under a 25-yr income based repayment plan every fraction of a percentage easily translates to over hundreds of thousands of dollars. A straight comparison between a standard repayment plan and the Income-Based Repayment plan shows a difference of over $500K, which is just about the ENTIRE value of the initial loan!
Initially, my wife and I were on an income-based repayment plan which was selected largely for its manageable rates and the offer of loan forgiveness following 25 years of qualifying monthly payments (sounded pretty good when we started). But after years of regular payments with no change to our financial situation, we have come to realize we weren’t intelligently tackling our loan debt. We had to get educated. We had to learn a financially responsible approach to making meaningful strides towards paying the money we owed. Ultimately, we need to change our mindsets and get aggressive.
Stay tuned for details on how we did that.