Surviving the big pay off

Russell Harrison might never have paid off his student loans if he hadn’t had his debt consolidated.

Upon graduating in 2008 from Rollins College in Winter Park, Florida, after receiving a bachelor’s of arts in music composition, he owed $40,000–50,000 in private and federal student loans. At the time, he was working at 7-Eleven and a Millworks furniture construction factory, operating heavy machinery. He worked mornings and attended school in the evening. On the side, Harrison did live sound gigs for clubs in the Orlando area. After defaulting on his first two payments, he received a letter that told him his student loan debt had been consolidated. Now, instead of paying three different lenders he pays only one, and at a lowered interest rate of 4.2 percent. Before his consolidation, Harrison’s interest rate on his private loans was 11 percent.

“Doing my own calculations, even making the minimum payments for the loans wouldn’t [pay for] all the interest,” said Harrison, who currently works at a call center in Chicago. “It would have been at a point where I just said, ‘Forget about it.’”

With the rising cost of higher education, it is more important than ever for students to understand their repayment options. Knowledge is power in terms of loan repayment, and it assures students that they can take charge of their debt responsibly after graduation. Despite these options, the cost of college is still a massive burden. To combat that, many activists and lawmakers are working to keep the issue on the

front burner.

Beyond loan consolidation, the government also offers seven common student loan repayment plans for paying off obligations in a way that works best for the debtor.

“What you need to do before you incur the debt is figure out how you’re going to pay it back,” said Mark Kantrowitz, senior vice president and publisher of, a tool for college students and families. “Unfortunately, too often, the students ignore it. They say, ‘I’ll figure out how to deal with it after I graduate.’”

For students that do not plan and monitor their student loans before beginning their college careers, the debt accumulated can be astronomical. Compounded with academic challenges, debt can adversely affect health.

In 2013, anthropology professors Thomas McDade from Northwestern and Elizabeth Sweet from University of Massachusetts, Boston surveyed 8,400 young adults ages 24–32 to analyze how debt affects mental and physical health. They found that people with higher student loan debt had an 11.7 percent increase in stress, a 13.2 percent increase in depression, poorer self-reported health and higher blood pressure than those without.

Sweet said while the study did not solely focus on student debt, it is a likely stressor for that age group. She said students are too focused on taking out loans, rather than thinking about how they will pay for it later.

“The potential consequences are not really in the forefront of our minds because we’re dealing with the immediate issue,” Sweet said. “It’s so accepted in our society [to] have debt in some way. Not only do we not personally think about the consequences, but I think we decided those consequences aren’t something we’re that concerned with.”

Yet tuition rates continue to spiral and debt follows. According to the U.S. Department of Education, college tuition increased 241 percent between 1982–2012. In 1982, the average cost of attendance at a four-year university was $9,554. In 2012, the average cost of attendance was $23,066, which is the latest data available. Columbia’s tuition was $21,200 for the 2012–2013 academic year, which is $12,516 less than the average tuition of private universities in 2012.

John Harvey, a professor of economics at Texas Christian University, said he thinks it makes little sense to burden students with cripplingly high debt. The U.S. can afford to make a college education more affordable or even free, he said.

“We certainly have the resources to have a class of people not currently producing, but simply sitting in a classroom, who will later be very productive citizens,” Harvey said. “We’ve made the cost [of college] prohibitive.”

Fortunately, there is more than one way for students to climb out of the hole. The government offers several repayment plans that fit specific needs.

They include: the Standard Plan, the Graduated Plan, the Extended Plan, the Income-based Plan, the Pay As You Earn Plan, the Income-contingent Plan and the Income-sensitive Plan. Whichever program a person qualifies for depends on his or her financial situation. There are also three main loan forgiveness plans sponsored by the government, including public service, the military and teaching.



This is the standard plan, which will put graduates on the fast track to paying off their debt within 10 years—but with higher monthly payments. Two-thirds of all direct loan borrowers were on this plan, as of June 2013.

“The Standard Plan is optimal in the sense that you don’t want to be in repayment for more than 10 years,” Kantrowitz said. “Anything longer than 10 years is a sign of financial difficulty. If you go from a 10-year term to a 20-year term, you are cutting your monthly payment by one-third, but you are more than doubling the interest you pay over the life of that loan, and you’re going to still be paying your own student loans when your children are enrolled in college.”

“The Standard Repayment Plan is optimal if you have the employment [and can] sustain that kind of payment for 10 years,” said Terrence Banks, a student debt counselor at Clear Point Credit Counseling Solutions. “Is that normal? No. Not in this economic climate.”

Extended Repayment Plan

In this plan, borrowers pay off their debt over 25 years at a lower rate than the Standard or Graduated Repayment Plans. However, additional interest builds up. To be eligible for this plan, students must have taken out at least $30,000.

If encountering long-term financial difficulty—say a borrower’s current income is insufficient to pay those monthly payments under standard repayment—usually students will look for the repayment plan that yields the lowest monthly payment, and that is either going to be Extended Repayment or one of the repayment plans based on income.

“The extended repayment plan does not count toward loan forgiveness,” Banks said. “There are certain programs that you may be eligible for loan forgiveness. That is one disadvantage from it … but the idea is the monthly payments are lower than standard repayment plan, and of course another disadvantage is it’s longer.”

Income-based Repayment Plan

Payments are 15 percent of the graduate’s monthly income and are readjusted each year based on changes in income and family size for up to 25 years. To be eligible for this plan, graduates must have loans that exceed their income by 15 percent in the Standard Repayment Plan. If after 25 years graduates do not default on any payments, they may be eligible to have all remaining debt forgiven. For graduates that work in public service, they could have that remaining debt forgiven in 10 years.

“The Income-based repayment plan is a 25-year payment plan in the worst case,” Kantrowitz said. “If your loan exceeds your income, you may be repaying your loans for Income-based Repayment for the full 25 years, and that could have a cascading impact on other priorities— you may not be able to buy a home.”

“It is affordable for most borrowers to pay,” Banks said. “The drawback is the negative amortization that goes along with it,” which refers to the increase in the balance owed, when payments are less than accrued interest.

Pay As You Earn Repayment Plan

The Pay As You Earn Payment Plan is the newest plan, created in 2011, with the lowest monthly payment, but it is not available to everyone under current rules. As with the Income-based Repayment Plan, graduates must be eligible. However, monthly payments are capped at 10 percent of the graduate’s income. This is not applicable for students who graduated before 2011.

“President Obama has proposed expanding the eligibility to everyone,” Kantrowitz said. “It’s unclear if that is actually going to happen as of right now. If you don’t qualify for Pay As You Earn payment, you do qualify for Income-based Repayment, so one of those two is going to be the option.”

“You could receive loan forgiveness after 10 years under the Public Service Loan Forgiveness program,” Banks said. “The drawback is the amount of interest may be higher than the Standard Repayment Plan. They also have a negative amortization rate.”

Income-contingent Repayment Plan

If graduates do not qualify for the Income-based or Pay As You Earn repayment plans but still want to keep monthly payments low, the Income-contingent Repayment Plan allows borrowers to pay off loans using either a 12-year or a 25-year plan. Students pay income tax on the debt that is forgiven after 25 years.

“The IRS will get a 1099C from the federal government, and that will report the canceled debt as though it were income to you, and then you’ll have to pay taxes on that unless you’re insolvent,” Kantrowitz said. “The IRS does have special rules if the borrower of canceled debt is insolvent. You have to apply for it, and you can potentially get that debt canceled, so it’s not a panacea.”

Income-sensitive Repayment Plan

This plan is an alternative to the Income-contingent Repayment Plan and is only available for up to five years after graduation. Monthly payments are based on annual income, and payers decide the percent of the loan they want to pay, but it must be within 4–25 percent of the payer’s annual income. This is an option for low-income borrowers.

“Income-sensitive Repayment is not available in the direct loan program, so it’s not really an issue for most borrowers these days,” Kantrowitz said. “There is Graduated Repayment.”

“Typically speaking, in one lifetime, you might have a job loss,” Banks said. “So that can have an impact in terms of the 10-year time frame.”

Graduated Repayment Plan

This is as quick of a repayment as the Standard Repayment Plan, but instead of paying at a fixed rate, payments start low and increase every two years to match the increasing income of borrowers. With the advent of the Income-contingent Repayment Plan in 1993, the Graduated Repayment Plan has lost popularity because it is less convenient.

“It came before the repayment plans that were based on income,” Kantrowitz said. “It was an attempt to have the monthly payments correspond roughly to the changes in your income. Parent PLUS are not eligible for the Income-contingency repayment plan. Therefore, they want something more like the Graduated Repayment Plan. It’s their best option.”

“You will likely pay more in total interest than on the Standard Repayment Plan,” Banks said. “Another drawback is the payments may not count towards loan forgiveness.”

For those who find careers in public service, government-paid jobs that serve people living in a certain area, loans can be forgiven to amounts up to $50,000. Loan forgiveness is available for full-time public service workers who have paid their loans for at least 10 years and have a remaining balance. Some public service jobs with lower salaries, such as teaching, can cut back on payments even more by combining public service loan forgiveness programs with an Income-contingent or Income-based plan.

Joining the military can also knock out a substantial chunk of debt. For example, enlisting as officers in the National Guard after college can allow people to have as much as $50,000 forgiven. The U.S. Army will provide up to $65,000 in additional compensation toward federal student loan debt. Each branch of the military offers a different program.

Before students incur debt, it is important to determine how they are going to pay it back, Kantrowitz said. But too often, the students ignore it or believe any education debt is good debt because it is an investment in the future.

“The problem is, too much of a good thing can hurt you,” Kantrowitz said. “You should pay attention to the paperwork you’re signing … and then at that point decide: Is that a reasonable amount of debt?”

Kantrowitz said students should borrow no more for their college education than their expected annual starting salary. For example, if students expect to earn $40,000 a year, based on their degree, they should borrow no more than $10,000 a year—ideally a lot less. If students borrow more, Kantrowitz said they are going to struggle to make payments under Standard Repayment and therefore will need an alternative repayment plan. Choosing a less expensive institution can benefit students for this reason because the impact on their lifestyle following college is reduced.

“Think of this as being the difference between getting a good car and a bad car,” Kantrowitz said. “Do you want to drive a Yugo, one of these really inexpensive cars, and be driving it for a decade or more, or do you want to be driving a Toyota Camry?”

Understanding repayment options is essential. Columbia’s Office of Student Financial Services give letters to graduating seniors referring them to, the federal loan government site, which outlines repayment options, said Pearl Natalie, director of outreach education and financial planning of Student Financial Services at Columbia. After graduation, financial advisors will reach out with a phone call to alumni, reiterating the importance of contacting a federal loan servicer to discuss repayment options.

Before disbursing loans, the federal government also requires all students to sign the Master Promissory Note, a legal document binding students to their loans and incurred interest, and complete an entrance counseling application that ensures they understand their loans and repayment options. It is not required for new students to meet one-on-one with the college’s financial advisors.

Despite all the repayment options, higher education is still prohibitively expensive and growing more so. Natalia Abrams, executive director and co-founder of, is a graduate of the University of California, Los Angeles. She was inspired to start her organization after the tuition at UC colleges increased 32 percent in 2009. Many of her friends were forced to drop out after tuition increased, she said.

Abrams said the most important thing young people can do to decrease their student loan debt is to seek change at the highest level and back candidates who support student loan reform.

Sen. Elizabeth Warren’s (D-Mass.) Bank on Students Emergency Loan Refinancing Act, which failed to pass the Senate in June, would allow graduates to refinance their loans at a lower 3.86 percent interest rate. President Barack Obama backed the bill and urged the Senate to pass it.

“This already affects 40 million Americans, and that doesn’t take into account those who are filling out their FAFSA forms right now,” Abrams said. “We would say listen to your legislators and see if they’re on the side of— as Elizabeth Warren puts it­—billionaires or on the side of borrowers. We’ve recently had the student loan debt-refinancing bill. See how your representatives voted in that and if you care about student loan debt, use that to help guide your political decisions.”