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Personal Finances / Paying Back Student Loans


Subject:  Re: 25 years/300 payments? Date:  10/16/2003  9:32 AM
Author:  W505a Number:  2841 of 4855

There are two situations:

Generally, once you consolidate AWAY from Direct Loans, it's very hard to get that loan to Direct. Long story, but there is a rule out there meant to protect the lender who borrowed money at a given rate to fund your loan. (Don't ask about any student protections against inflation falling and rates going down! Or finding a career that is steady enough to pay the loans back, etc.)

Under ICR ("income contingent repayment"), there is a formula to determine how much per month your payment is going to be (changes every year). You have to hit that amount each month for 300 months. Deferment and forbearance don't count.

Depending on the size of the loan and the amount of income you have, you may be paying 15% of your income under that situation. The payment schedule is pretty progressive---so if you are not making much, there isn't a big payment. But it ramps up pretty quick, in my humble opinion.

The BENEFIT of ICR payments---no matter what the borrower is earning---is that if the loan is big enough, the ICR program also shuts off the interest compounding after a certain time. I think they will let 10% of the interest compound, and that's that.

So if you are in a situation where you are not even covering interest, and "foresee" this circumstance for even 5 years, I think you definitely want an ICR type program. It's hard to explain, but mathematically very easy:

1+(.08*25) is a lot less than (1.08^25) (1.08 to the 25th power or 1.08*1.08*1.08*1.08*1.08*1.08 out to the 25th time.)

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