It's important you understand how a loan's terms will affect repayment before you borrow. While education loans may seem alike, they can be very different from another. Every loan you borrow could have different interest rates and repayment terms from one year to the next. Some lenders may even alter terms at different points in a single year.
Loans may differ for the following reasons:
- The loan has the same name, and same lender, but it's for a different school term.
- It's the same school term, and lender, but the loan has a different name.
- It's the same school term, but a different lender.
One option for simplifying your loan payments is to consolidate loans by loan type and lender. This could mean consolidating all federal direct loans into one loan, and all Alaska State supplemental loans into another.
For example, if you borrow $6,500 a year in unsubsidized federal direct loans, and $3,500 a year in Alaska Supplemental loans you will have a total loan principal debt of $40,000 (plus any accrued interest) when you graduate in four years (additional years will add to the cost).
Because these are two different kinds of loans from two lenders, you will have at least two payments, even if you do consolidate. Let's say you consolidate your federal loans at 5%, and your supplemental loans at 6.7%. You will have two payments - $275 for your federal loans, and $160 for your supplemental loans; for a total of $435 per month for 10 years.
When consolidating is not in your best interest:
- The current consolidation interest rates are higher than the interest rates on your existing loans.
- If consolidation cuts down on your repayment options.
Rule of thumb for repayment:
Your monthly student loan payments should not exceed 8-10% of your monthly salary. In the above example you will need an annual salary of a little more than $52,000 to be able to repay a debt of $40,000.
It is always wise to research your earning potential for prospective majors before you borrow for your education or training.
For help researching prospective salaries, check out the Alaska Career Information System (www.akcis.org).
Find an online calculator to help you estimate what your payments will be after graduation. These are available at:
Pay as you earn:
If your earnings fall below your recommended 10%, you may be eligible for a repayment plan called Pay as you earn that caps your loan payment to a percentage of income – but keep in mind such caps cover only federal loan payments NOT any non-federal /supplemental loans .
What does this mean? Staying with our earlier example, let's say you only make $35,000 a year. If you're approved for Pay-As-You-Earn, for a family of 1, your federal payment will be capped at $234, saving you $41 per month – although you'll now be making that payment for 15 years instead of 10.
But, you will also still have a monthly payment of $160 for your supplemental loan (that payment will end after the standard 10-year repayment period).
This is just one example. Repayment options can vary widely, just like interest rates. The most important thing to remember is to read the fine print before you sign any loan promissory note, and understand what your options are when you enter repayment.