• Graduated repayment. This might be a sensible choice for graduates who believe their first incomes will be modest. The monthly payment is the greater of two numbers: the interest that accumulates every month between payments, or half of the payment under the standard repayment plan.
• Income contingent repayment plan. In the DIRECT version, payment is based on income, family size, interest rate, and the size of the loan. The Department of Education will verify the borrower's income with the Internal Revenue Service. The FFEL version is called "Income Sensitive Repayment" and calculates payment on income and loan amount. The lender may ask for proof of income.
With the exception of the income-contingent repayment plan, parents who borrowed under the PLUS program can choose from among the above options.
Before choosing a payback plan—especially if you intend to extend your payments over a longer period of time—consider how much the loan will cost in the long run. Think about it: If you borrowed $10,000 in unsubsidized DIRECT Stafford loans and pay it back in $123 monthly payments for 10 years, you'd pay $4,718 in interest (for a total of $14,718). But if you pay $97 a month for 15 years, you'd pay $7,464 in interest (for a total of $17,464). That's $2,746 more for the same education. Also keep in mind that the interest on student loans may be tax deductible.
Consolidation
Graduates with several student loans can simplify the payment process by taking out a new consolidated loan that pays off the old debts. Why consolidate? Convenience, as there's only one monthly payment, and possibly savings, as the new loan might lock in a lower interest rate. Different types of loans can be consolidated, and you don't have to consolidate all of them.
The interest rate on the new loan will be the average of the interest rates on the loans you're consolidating, weighted for the size of each loan. You can still choose from a variety of repayment options. As of this writing, the new interest rate is fixed and will last for the rest of the loan's lifetime. However, Congress has discussed making the interest rate on consolidation loans variable. To get a glimpse of how much interest you're likely to pay if you consolidate, try the worksheet and loan calculator provided by Mapping Your Future, a nonprofit financial aid website sponsored by 35 loan guaranty agencies (www.mapping-your-future.org/features).
Consolidating isn't for everyone. Yes, you might nail down a low interest rate, a low monthly payment, deal with only one lender, and have an array of flexible payment options to choose among. It's free, and deferment is still an option. However, you can consolidate only once, so if rates go down later, you're out of luck. And if you stretch our your loan over a longer period of time, you might get stung with a higher interest tab. Depending on the loan, you may lose any forgiveness options—which we'll get to later on—and you may also wipe out other benefits. For instance, Vermont students who borrowed through the Vermont Student Assistance Corp. lose their annual loan rebate if they consolidate.
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