by Cynthia Lubin

After my last blog post on “The Frugal Feminista” where I shared my experience with managing a whopping $100k+ student loan burden surprisingly more people than I thought reached out to me and opened up about their own personal bouts with student loans. While everyone I spoke with had a unique story, everyone (including myself) had the same concerns about what their repayment options were.

It has been in the news lately that President Obama is trying to help make student loan repayment more manageable for borrowers. The President has introduced a plan to create different payment options capped at a certain percentage of one’s income and loan forgiveness after a certain number of years of public service or consistent payment. While the President’s initiative is a step in the right direction, it is important to understand that lower payments may help in the short term but you should also know what that means in the long term.
Here are a couple of things to know when considering your options:

Understand the Loan Term
I remember when I worked as a mortgage originator, clients would call my office and say that they wanted to get their payments as low as possible. Normally a traditional 30-year loan would give them the monthly savings they were looking for and they would be happy with my proposal, that is until I bought up the total cost over the life of the loan. People were often surprised how much interest they would save on the same loan amount but with a shorter loan period and slightly higher monthly payment. The reason being that the longer you hold the loan, the longer you pay “rent” or “interest” to the lender. The same goes for student loans. Traditional student loan terms are based on a 10-year repayment plan but in efforts to keep payments low, payments are now being determined on 30-year terms which could mean tons of additional interest costs.

Understand the Minimum Payments
As mentioned earlier, the government has introduced new repayment options over the years specifically for student loans. There are the more traditional “level pay” options which offer fixed payments based on the length of loan and interest rate similar to a mortgage or car loan. There are also options with payments tied to your income (based on the percentage of income) such as Pay as you earn (PAYE), Income-Based Repayments (IBR) or Income Contingent Repayments (ICR). Each option has different qualification criteria, they all use different income thresholds to determine your minimum monthly payment and they all have different costs.
A consideration of reduced payments typically seen with the income-based payment options is interest capitalization. Essentially because you are maxed at a certain threshold, your monthly payment may not make up the full principal and interest payment as determined by your original loan terms. As a result, any unpaid accrued interest gets applied to the outstanding principal balance of your loan. The more the loan capitalizes the more costly it will be in the long run.

Understand the Interest Rates
While we don’t have much control over interest rates it is still an important consideration. Effective July 1, 2014, interest rates on Federal loans will now be tied to the 10 Year Treasury Bill plus a fixed percent depending on the type of loan you take. What this means is that each year the borrowing rate of interest may go up depending on the market. Therefore the same loan amount you borrow this year may cost you more next year if you take out a new loan. Once you are locked in, however, the rate on your loan will not change. So if you are considering a consolidation loan compare the rates you currently have to the market rate to see if it make sense.

Understand Your Goals
Which loan repayment option is best depends on the individual person, their circumstances and their goals (who knows, you may need some flexibility now while that six-figure salary is on its way!). There are tons of financial calculators out there to help you discern which option will help you best meet your specific needs. The most important steps you can take are determining what your short and long terms goals are, understanding your current student loan terms, understanding the costs of the different repayment options you are considering, being diligent with the repayment plan you decide best meets your goals and whatever you do don’t give up!

Cynthia Lubin, CPA is an all-around financial service professional. Since she was a child she has always had a passion for helping people, numbers, and money upon which she ultimately built her career having over 10+ combined years in Financial Services and Accounting. She has worked as a loan officer, qualifying individuals and couples for various home financing programs. She later went on to become a personal banker helping people manage their banking, retirement, and certain investment products.

Cynthia has never given up on her passion of helping build people build wealth. In 2014, she decided to step out on faith and start her financial consulting business “Cyn”sationally”You” where she will work with clients to improve their current financial situations and make them “Cyn”sational!

“If you’re drowning in student loan debt and want support, strategy, and guidance on how to accelerate your student loan repayments, then join our 5-Day Slay Sallie Mae Challenge. 

Feel free to contact Cynthia at Cynthia.lubin@gmail.com or 973-908-8318 to find out about her services.