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College Graduates Should Consider Their Federal Loan Repayment Plans

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College graduates have six months before they need to start paying back their student loans, and they have possible repayment plans to consider. NY1's Money Matters reporter Tara Lynn Wagner filed the following report.

A recent survey by Fidelity Investments found that a whopping 70 percent of the class of 2013 will leave school with a diploma and a mountain of debt, on average about $35,000. These graduates may have six months before they need to start paying off federal loans, they would be wise to use this grace period to weigh their options.

The first is, of course, the standard repayment plan.

"Which is where they take their total balance, divide it amongst 10 years or 120 payments, including the interest, and it will be an even payment all the way through," says Michael Turner of the New York State Higher Education Services Corporation.

Those who would rather wade their way out of debt can choose the Graduated Repayment Plan. It also takes 120 payments over 10 years, but the monthly amount starts smaller and increases over time. While it is easier to manage when one is earning a starting salary, the debtor will end up paying more in the long run.

"Any time you are doing a payment plan where you are paying less than what the total principal and interest is, you're going to be paying more on the loan over time," Turner says.

The same goes for the Extended Repayment Plan, which allows some borrowers to extend payments from 10 years to as much as 25. Again, the same trade-off brings lower monthly payments and more interest over time.

Those who absolutely cannot make their payments have options, and can talk to their lender about deferment or forbearance. But experts say these tactics should only be used when all other alternatives have been exhausted.

Turner advises students to see if they qualify for an income-based repayment plan. These allow borrowers to get a specialized payment.

"Based on their income, based on family size and the total amount of debt they owe, and this income-based repayment is not going to be any higher than 15 percent of what they call 'discretionary income,'" he says.

This option works best, he says, for borrowers who have lower incomes and higher debt loads and while some could be making payments for as much as 25 years, Turner says, "If you are still on this thing for 25 years, the government will just forgive it."

These options apply to borrowers with federal student loans and each has its own set of requirements. To see which plans one might be eligible for, visit hesc.com and click on the "Loan Repayment Advisor."

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