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A Student Loan Debt-ucation


About this time last year I wrote a blog post that was A Commencement Address to the Class of 2011. In the post I looked back on my years since graduating and reflected on things I was glad I did, things I shouldn’t have done and things I wish I knew from the start.

To build on that article, I want to focus on another topic related to graduation – student loan repayment*. The numbers vary from source to source, but the typical college graduate in 2010 is now walking away with an average loan debt of roughly $25,000. Add on a Master’s or Professional degree, and that number can skyrocket. With such a large financial obligation staring new graduates in the face, it’s important to understand how to tackle paying these loans back.

A few common terms…

Before talking about repayment, it’s important to understand the terminology that is often associated with student loans. Here are a few of the most commonly used terms:

    • Subsidized – with a subsidized loan, interest is not charged while you are in school or during your grace period.
    • Unsubsidized – with an unsubsidized loan, interest begins to accrue when the loan is issued. It will continue to accrue while you are in school and during your grace period.
    • Grace Period – When you graduate, you don’t have to automatically start repaying your loans. You are granted a grace period of six months before repayment begins. So if you are graduating in May, you won’t have to make your first payments until the last few months of the year.
    • Consolidation – allows you to combine your eligible federal education loans into one loan and a single monthly payment. If you have several loans with variable rates, this option could make sense by allowing you to lock in a fixed rate. If your loans are all fixed rate, the decision to consolidate will likely be based on the convenience of having just one loan and one monthly payment.

What are my repayment options?

The most commonly used repayment plans are the Standard Repayment Plan and the Extended Repayment Plan. With the standard repayment plan you make monthly payments over the course of 10 years to pay off the balance of your loans. The extended repayment plan – only for those with more than $30,000 in loans – allows you to make your payments over a 25 year period. While this option will significantly lower your monthly payment, it’s important to realize that you will pay a lot more in interest over the life of the loan, as shown below.

    • Assuming a $30,000 balance and 6.8% interest rate:
      • Standard Plan: $345.24 per month with total payments of $41,428.92
      • Extended Plan: $208.22 per month with total payments of $62,466.49

What if I can’t afford my payments?

If you are having trouble making your loan payments, the loan servicers at the Department of Education will work with you to find a solution. There are generally three options when you are having repayment issues:

    • Change repayment plans – you may be able to qualify for an income-contingent repayment plan that caps your monthly payment at a certain percentage of your total income. This amount would then be adjusted as your income changes.
    • Deferment – this option allows you to temporarily stop making payments on your loan. As long as you are enrolled at least half-time in an eligible postsecondary school you can defer your payments. For a financial hardship such as unemployment or while serving in the Peace Corps you can defer payments for up to three years. You are not responsible for paying interest on your subsidized loans during a deferment.
    • Forbearance – similar to a deferment in that it allows you to temporarily stop making payments. The major difference is that with a forbearance you will be responsible for any interest that accrues on both your unsubsidized and subsidized loans.

Where can I go for more information?

The website for the Department of Education’s Direct Loan Program,, provides an extensive amount of information about the loan process. In addition to guiding you through the loan process from start to finish, the website also provides links and references to other websites that offer information on student loans.

As always, if you have any questions about student loan repayment options, or questions about any aspect of your financial life, feel free to contact a Smart401k adviser at 877.627.8401 or

Joe McCulloch

Senior Investment Adviser

*For consistency purposes, all loans discussed in this article are assumed to be Direct Loans from the US Dept. of Education


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Smart401k is a web-based investment advisory service providing unbiased recommendations to help people invest in employer-sponsored retirement plans. Smart401k provides service to nearly 11,000 clients who collectively have more than $2 billion in assets. Plan participants receive personalized, fund-specific investment recommendations and the support of professional investment advisers available to discuss all investment questions. Based in Overland Park, KS, Smart401k is online at


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