By Christopher F. Owen, Esq.

Some time ago, I made my first payment on my rather large student debt.  I did so knowing full well that it may never be paid in full because of the new rules concerning debt repayment.  This, however, is not a major concern for me and I suggest should not be for other graduates as well.

First of all, I am grateful for the loans that allowed me to return to school, earn a second degree and pursue a new career.  While in school, when discussing our student loans, my informal, and often ignored question to my younger classmates was “Why pay off your loans any faster than necessary, especially given that you have now gone through many years of schooling and probably need a new car, housing and several other things that are now relevant after graduating?”  My suggestion was for them to not burden themselves unduly with higher than required loan payments when the government is nice enough to say, take your time – just pay us back as you can.  This approach is embodied in the relatively new repayment plans called Income-Based Repayment or “IBR.”  These plans stipulate that whatever balance is still owed after twenty years of requisite payments will be written off, or ten years if you work for a non-profit or similarly qualified entity.  If any student borrower hasn’t heard of these plans by now, they should discuss them with their loan servicer and/or student aid officer.  Here is why I advocate using one of them to reduce loan payments to as little as possible.

Prior to starting my repayments, I was in discussion with my debt servicer over my repayment plan options and was asking about using IBR.  My thinking at the time was that I would rather have lower set payments that I could easily make rather than higher payments that I might struggle with if my unemployment continued or there were other unforeseen difficulties or expenses.  I thought too, that if the payments were set low to begin with, that were I to get a job I could then make larger payments, either putting extra money on the loans with higher interest rates to reduce total interest, or conversely onto the smaller ones to try and eliminate them so I could then focus more on the others.  But I was concerned that if I paid more than required I might be disqualified from future IBR payment plans on the basis that I could apparently afford more than the minimum.

Fortunately though, my servicer asked me this rather important and thought provoking question: “Why would they want to do that”, (disqualify me for paying more than the minimum required), “when the loan is being set up to write off the balance in twenty years?  If you pay more than the minimum, they will write off less.”  The problem restated became why would I pay more than required under my repayment plan?  Considering the substantial benefit of writing off the balance owing in twenty years (ten years if I work for a qualifying entity), doing anything to minimize that future benefit is not advantageous.  It’s like a generous and wealthy relative says, “I want to give you a loan for your education, and if you pay me minimal amounts as best you can for twenty years after graduation, I’ll write off the balance owing at that time.”  Would you say, “NO WAY!” or take advantage of such an offer?  Smarter individuals would jump at such an opportunity, as they should.  And for those concerned about the interest, remember it too will all be written off.

There are two very important provisos to consider.  One, this future benefit will be taxable at your then current marginal rate.  The other consideration is the potential effect these outstanding loans might have on your credit score.  However, the effect on mine has been minimal, with my score actually improving as I continue to make my regular payments.  I still argue that the benefit from using one of these IBR plans far outweighs the negatives.  Please note too that these programs are only available for federal student loans.

Hopefully I have demonstrated that having student loans is not as bad as many seem to think and it is how the loans are managed that makes the difference.  While this approach might not suit everybody, and as a relatively new loan program might not be available to all borrowers, I maintain that it merits more consideration than the traditional student loan advisers and counselors are currently giving it.