Paying back your loans


– [Instructor] In previous videos, we’ve been talking about taking
out loans to pay for college if you can’t cover the cost
through some combination of scholarships, Work-Study, and savings. But if you do end up taking out loans, it’s important to discuss what comes next. Specifically, you have
to pay these loans back at some point. So today, we’re going to talk
about that payback process and how you can make sure it’s manageable. On that note, we’re very, very lucky to have personal finance
expert Beth Kobliner here with us today. Beth is on the President’s
Advisory Council on Financial Capability
for Young Americans, and she is also the author of the book, “Get a Financial Life.” So Beth, thanks so much for
being here with us today. – [Beth] It’s really great to be here. – [Instructor] All right,
Beth, let’s dive right in. Most students are worried about taking on too much debt for college. Are students really
taking on that much debt, and if so, how can I
as a student make sure that the debt I take on is manageable. – [Beth] Right, well the
numbers can seem really scary. Most kids are taking on debt. 70% of kids who graduate
from college these days do have student loans, and they’re leaving school
with about $30,000 in debt, both federal and private student loans. To some extent, taking
on debt is unavoidable, but it’s not an awful thing either because if you are able to
get federal student loans, the interest rates are lower and you have more repayment options. And I think that’s a
key for a lot of people to be aware of. – [Instructor] Great, so
let’s talk about these loans, and if I’m a student
who’s gone through college and I’m about to graduate,
I’ve taken federal loans, what do I need to know
about the repayment process? – [Beth] The first thing you want to know is as you’re about to repay your loans, when you have federal student loans, is you want to figure out how much you owe and to whom you owe it. You probably got a new
federal loan each semester, and that interest rate is fixed, but then the next year
when you get a new loan, that interest rate is also fixed. So you have a bunch of loans out there from many different years, often at several different interest rates. So, you want to see what’s
out there and see who you owe, and there’s a good site, the National Student Loan
Data System, nslds.ed.gov. You can click on financial aid review to find out what you owe and
the company you need to pay, which is known as the loan servicer. – [Instructor] Got you,
and that’s because each of the times you take out a federal loan, it might not actually be
from the same loan servicer? – [Beth] Correct, and the
interest rate will be different, and the amount will be different. But one thing you can do is
consolidate all your loans at that point, which is
basically mush them all together through this program called Direct Consolidation Loan Program, and it allows you to make
one payment each month at a fixed interest rate. And to get more information, you can go to
studentaid.gov/consolidation. And the way consolidation loans work is, it’s simply the average
of the interest rate for the loans you’re combining,
rounded up a tiny bit. – [Instructor] Great, so
the consolidation actually lets me take all of these
different federal loans that I’ve taken over the
course of maybe four years, put them all together into one loan that has an average of the
different interest rates, and then I can pay that
back with a single payment every month as opposed to making a bunch of different payments to different people. Is that right? – [Beth] That’s right. And it’s good because
you limit your chance of risking missing a payment and getting into deep financial trouble, which really is of all
of this probably one of the most important thing is you want to make your payments in a timely way. – [Instructor] All right,
so we’ve been talking about repaying or consolidating loans, but I may graduate and not be
able to find a job right away. So if that’s the case, is
there anything I can do, or am I out of luck? – [Beth] Well, the fact is,
this is a realistic problem for a lot of young people. And the good news is for
most federal student loans, you don’t have to start
paying them back actually until at least six months after graduating or leaving school. But even at that point, if
you can’t make the payments, maybe you can’t find a job, or you’ve gone back to
school, grad school, you should then apply for
what’s called a deferment, which lets you off the hook
from paying back your loans for three years or more, among some other benefits it offers. If you don’t qualify for a deferment, you may still get a break by applying for something called forbearance, which allows you to reduce
or stop making those payments for up to 12 months at a time. That’s less than deferment, but it’s still a definitely helpful option. You’ll want to check out studentaid.gov/deferment-forbearance
to get the details. – [Instructor] Great, well
it’s wonderful to know that there is some flexibility out there if I can’t begin immediately
paying back those loans. But when I am ready to
start paying them back, what exactly do I do? – [Beth] Right, so this is where it gets kind of interesting. You’re automatically enrolled in the standard repayment plan, which basically requires that
you make the same payment every month for 10 years until
the whole loan is paid off. This is generally the
least expensive option when it comes to paying back loans. But if you can’t afford that, there are other repayment
plans to choose from. And the best place to go
to figure this all out is studentaid.gov/repayment-estimator. This is a really great source
because you could just plug in your information to figure
out which repayment plan really makes the most sense for you. – [Instructor] Great, well can you tell us a little bit more, since
the standard plan is sort of the default that people are placed in, and as you said, if you
can afford to do it, it tends to be the
least expensive overall, can you kind of give us an
example of how it would work? – [Beth] Absolutely, so with
the standard repayment plan, you basically pay off
your loan over 10 years. And let’s take an example
of a student named Gabe. He’s a recent graduate,
and say he owes $30,000 in Direct federal loans. So let’s assume, I’m just
making some assumptions here, his interest rate is 4.7%, which is the current
rate for Direct loans. With the standard 10-year repayment plan, Gabe would owe $315 per month. So over 10 years, he
would’ve had to pay back the $30,000 plus an
additional $8,000 in interest. So his total cost of the loan is $38,000. Now remember, these are
just rounded up numbers that we figured out, but it
generally gives you a good idea of what that standard
repayment plan would cost you. – [Instructor] Great,
so I can get this sort of information on the repayment estimator. In addition to the
standard repayment plan, what are some other options for Gabe if that $315 a month
doesn’t sound realistic, particularly right when he’s
graduating from college. – [Beth] Exactly, so
there’s several others. But remember, these are
all for federal loans only. But one’s called the
graduated repayment plan, and this is good for
people who can’t afford that monthly payment of 315 per month, but they’re pretty sure that their income is gonna increase over time. So with graduated repayment,
payments start very low and manageable and then jump
up a notch every two years until it’s paid off in 10 years. The downside is you’re gonna pay a little bit more interest over time. So in Gabe’s case, with
graduated repayment, he’d pay just $180 a month
for the first two years, but $530 a month for
the years nine and 10. So you compare that to the
315 Gabe would pay every month with standard repayment,
and clearly it’s less at the beginning and more at the end. So with graduated over 10 years, he’d pay back the $30,000
plus an additional $10,000 in interest, so his total
cost for the graduated plan would be about $2,000 more
than standard repayment, or the total cost for the
graduated plan would be $40,000. – [Instructor] Got ya,
so for that $30,000 loan, for Gabe it sounds like if he can afford the standard repayment plan upfront, he can save a little bit of
money over the long-term, but if he needs the
flexibility of low payments in the beginning, he can
take the graduated plan and then pay a little bit more overall. – [Beth] That’s exactly right. – [Instructor] Great, and
are there any other options that Gabe should consider,
particularly if he doesn’t have a very large income at
the start of his career after graduating from college? – [Beth] Right, well there are other plans called income-driven repayment plans, and they basically look at your income and how much money you owe
to figure out whether you can make very, very low
monthly payments at first based on your income if
you have a low income. The thing about these income-based, these income-driven plans is that after a set number of years, your debt is actually forgiven,
which is a good thing. But realistically, the best
way to think about these plans is that they’re a temporary
option to help you while you’re young and really
not making very much money, but as your salary grows over time, you’re probably gonna have to switch back to the standard repayment plan. – [Instructor] Great, and
that makes a lot of sense. And so, speaking of
income, there are obviously some career paths,
particularly ones that focus on public service, that tend to pay less. How does that factor in to
taking out college loans, and are there any options
to sort of help people who decide to go into
those sort of professions? – [Beth] Right, so, if you are a do-gooder or somebody who just wants to help others, there’s a program called
Public Service Loan Forgiveness that you have to look into. Because it could be really advantageous in that it completely wipes
away your remaining debt after 10 years. But to be eligible, you need to commit to a long-term job or career in teaching, public health, law enforcement, military, and you have to do so for 10 years. So with this plan, the strategy would be, if you’re going into public service, you’d want your monthly
payments for the first 10 years to be rather low so you’re
not paying so much upfront, and then after the 10th year, if you owe a lot, the good news is, with this kind of program,
those debts are forgiven, which is really a great,
great thing for somebody who has really committed
themselves to public service. If you’re doing public service
but you’re not committing for 10 years, fewer than 10 years, say you’re going to the
Peace Corps or AmeriCorps or teaching in a low-income
area or the military, there are other student
loan forgiveness programs. You can check out
studentaid.gov/forgiveness, and you can get a sense for
what your options would be. – [Instructor] Great, so it
sounds like there really is some flexibility for folks
who decide to take paths that maybe don’t pay as
much as far as student loan repayment is concerned. – [Beth] Right, don’t pay
as much and help others, which is sort of a nice thing that there’s some payback there. – [Instructor] Great, and
Beth, the last question I want to ask you is I’ve heard that there are some potential tax breaks for students who are
paying back their loans that I should be aware
about as I’m graduating from college and starting
to repay my loans. – [Beth] Right, well probably
the most important is you may be able to deduct up to $2,500 of the interest you pay on
your student loans each year. And that would be on your
taxes, on your tax return. So it definitely is worth checking it out. – [Instructor] Great, well
Beth, thank you so much for taking the time with us today to talk about student loan repayments, and we really appreciate your time. – [Beth] Oh, thank you so much.

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