Graduating with a Lighter Load

Many families find they must borrow at least some money to help pay expenses for their college-bound teenagers. Student loans can provide a significant share of a student’s total financial aid package. Although many college graduates often find themselves entering the job market burdened with thousands of dollars in college loan debt, a Federal program may help ease that burden by offering attractive terms and rates.

The Federal Direct Loan Program, which began in 1994, allows students to borrow directly from the Federal government. The direct loan program simplifies the process and offers a variety of repayment options. The repayment plans are open both to participants in the direct loan program and to students wishing to consolidate multiple loans from private lenders or other Federal programs. Here are the available repayment options:

  • Standard Repayment. Loans are generally repaid in up to a 10-year period with a fixed amount of at least $50 per month, although a shorter repayment time may apply to small loan amounts.
  • Income Contingent Repayment. This plan bases repayment on the student’s income after graduation, limiting payments to 20% of the borrower’s monthly discretionary income. The attractiveness of this plan is that payments will rise along with rising income, but there is a potential danger for borrowers who find themselves in lower-paying jobs for an extended period of time. Should payments be so low as to not cover all of the interest due, the unpaid interest will be added to the principal, increasing total costs. Any debt remaining after 25 years will be forgiven if the equivalent of 25 years of qualifying monthly payments have been made. Forgiven debt is considered taxable income, however, creating a potentially thorny tax problem. Nevertheless, income contingent repayment plans might make sense for graduates whose career paths have a high probability of rising income.
  • Graduated Repayment. Under this plan, a loan can extend up to 10 years with payments that begin lower, but rise over time. The assumption behind the plan is similar to that with income contingent repayment: A person’s income will increase over time with their experience. However, the graduated repayments are structured to increase automatically over time, independent of income that could rise, fall, or generally remain the same.
  • Extended Repayment. The repayment schedule can be extended up to 25 years with lower payments, which can be fixed or graduated.

One significant feature of the Direct Loan program is that borrowers are not locked into a repayment plan—switching among options is permitted, and prepayment can be made without penalty. This flexibility may help young adults who are just getting started in an uncertain job climate and who may face job loss or career transitions later.

If you are currently dealing with college expenses or will be facing them shortly, you may want to take advantage of Federal incentives to save for post-secondary education, as well as Federal programs to assist in financing academic pursuits.

For more information, contact the Federal Student Aid Information Center at or the College Board at

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