Ask Money

What can be done about ridiculously high student loan interest?

Marketplace Staff Aug 11, 2013

Question:

I hear all about the recent squabble regarding increasing interest rates on student loans, and then the decision to bring the rate back down. I hear NOTHING about the students who are stuck in high interest rates from recent years past. My son, age 27, graduated with a Master’s degree in 2010. His interest rate is over 8 percent on a roughly 70k loan. This was a government loan, not through a bank. He now pays just under one thousand dollars each month. You can only imagine the strangle hold it has on him. Fortunately, he found a job almost immediately and has never missed a payment. On the other hand, his car has over 200,000 miles on it and he is sharing a house with two others to make it “work”. At this time when mortgages are refinancing at under 4 percent, what is HIS option? I’ve tried researching this with local banks and they offer nothing. Please don’t tell me that the only folks left paying this ridiculous rate are our ambitious recent students who tried to “do the right thing” by getting an education! Reducing his monthly payment, only to extend his term(!) is not a solution in our opinion.

Response:

Chris Farrell Aug 30, 2013 Economics Editor
It’s tough launching a career with so much debt. However, I’m glad he got a job right away. It looks like his investment in an advanced degree is paying off.

I understand your dislike of the idea of reducing his monthly payment now by extending the terms of his loan. The price tag for taking advantage of easier loan terms today by stretching out payments in the future is an increase the cost of the overall loan.

I would revisit this option, however.

Here’s why: There is no prepayment penalty with federal student loans. Your son can always accelerate his student loan payments later on when his financial circumstances improve. In other words, he has the ability to maneuver for some financial relief right now, a welcome respite, without boosting (by much) the overall price tag, assuming his graduate degree continues to pays off in the job market. If he goes this route, the trick is to follow through on taking advantage of pay increases to hike his monthly loan repayments. He should send the extra money to pay down principal. 

I would recommend that he look into one of the income-sensitive repayment plans, such as the income-based repayment plan. Most borrowers will have a monthly payment under income-based repayment that is less than 10% of gross income. It may be that the graduated payment plan or some other option is better for him. The student loan website Finaid has a nice chart comparing the various repayment plans here: http://www.finaid.org/loans/repayment.phtml

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