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Ask Money

Easing the burden of student loans

Chris Farrell Jun 29, 2011

Question: I just graduated with my MFA. I have consolidated my undergrad and graduate loans and have $76,000 of loans at 6.8%. In September I will be starting one year an artist residency in Houston, TX, it should be a great opportunity but doesn’t pay much. I also don’t see making a lot of money in the near future. My plan is to be on the IBR repayment plan, most likely I will not have to pay anything at least for the first few years, then see what happens or in 25 years have the remaining debt canceled.

Do you have any thoughts or opinions on the IBR plan? Is there something else that would be better? Melissa, Athens, GA

Answer: In general, I’m a fan of the income-based repayment plan or IBR for people who won’t earn much because of their career choice–at first at least. It uses a formula that takes into account income, family size and your state. It’s a sliding scale, but for most people their monthly payments should run at 10% or less of their income. The loan is forgiven after 25 years. (You can learn more about income-based repayment here.

However, there are a number of other options for lowering the monthly payment burden of student loans. I would run the numbers to make sure you come out best with the IBR.

The other main options are:

A graduated repayment plan: The amount you owe increases every two to three years.

An extended repayment plan: It lets you increase the length of your loan from 12 to 30 years. You have to pay a monthly minimum of $50.

An income contingent loan: The repayment with this loan fluctuates with your income. You don’t pay much in lean years and more when you’re doing better. Whatever is left on the loan after 25 years is forgiven.

All these options–including the IBR–carry an important trade-off: You buy upfront financial relief in return for increasing the overall size of your loan. Hopefully, with time your financial circumstances improve and you’ll get rid of the loan early. There is no prepayment penalty with student loans.

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