However, let’s say you took consolidation-eligible loans for both your undergraduate and graduate degrees, and your total loan balance is $65,000. Given the same 10-year repayment schedule at 6.8 percent, your monthly payment should be about $748, and likely requires salary of nearly $90,000 to afford the payments comfortably. While you have a master’s degree, you might not land a $90,000 job if you have no experience.
As I mentioned last week, one advantage of consolidating your student loans is the ability to spread your payments over an extended payment period; thereby making your payments more affordable. Yes, this means you will pay more in interest over the life of the loan, but that is not the important thing at this stage of life. What matters is cash flow.
The standard repayment period for federal consolidated loans is based on your loan amount. If your total indebtedness is between $7,500 and $9,999, your maximum repayment period is extended to 12 years; for $10,000 to $19,000, the repayment period is 15 years; for $20,000 to $39,999, the repayment period is 20 years; for $40,000 to $59,999, the repayment period is 25 years, and, finally, if your loans are more than $60,000, the repayment period is extended to 30 years. By amortizing a $22,400 consolidated loan balance over 20 years at a 6.8 percent fixed interest rate, your monthly payment should be about $171. Likewise, a $65,000 loan balance spread over 30 years should reduce your payments to around $424 per month. You should be able to comfortably pay this loan with an annual salary of $50,850. You can make extra payments to principal when you are able, which will reduce the repayment term and interest paid over the life of the loan. However, choosing the 30-year loan term will preserve the lower fixed minimum payment in the event of a job loss.
With a consolidation loan, you also have the option of a graduated repayment plan where the minimum payment period is between 10 to 30 years, depending on the balance. The payments are not fixed, as they start low, and increase every two years. For example, a $65,000 consolidation loan on a graduated repayment plan at 6.875 percent interest should have a starting payment of $372.40. You could possibly be in your 11th year of repayment before your monthly bill increases to $427.60. By your 30th year of repayment, your monthly payment should be $548.48. Ideally, your payments increase as you advance in your career and earn more money. However, you generally pay more over time with this option versus the standard repayment plan.
Some loan servicers offer an extended repayment plan, but your individual loan balance must be more than $30,000. Consolidation may also help in this situation. By combining the loans, you may be able to meet the higher loan balance requirement for extended repayment periods, with both fixed and graduated payments options.
Next week I’ll take a look at some other beneficial repayment options: income-contingent repayment, income-based repayment and the new pay as you earn option.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.