Dear Carrie, I'm considering an income-driven repayment plan for my existing Federal student loans. The low payments and possible loan forgiveness make it great at my current salary. But what's the incentive for getting a higher paying job? With interest adding to my debt and payments going up with my salary, it seems I end up with the same amount of disposable income whether I make $30,000 or $60,000. Am I missing something? --A Reader
Dear Reader: Student loans are a fact of life these days and generate a lot of questions. The good news is that in recent years, the government has expanded the number of programs available to keep payments on Federal student loans more affordable.
Income-driven repayment plans do exactly what their name implies. The lower your income, the less you'll pay each month. If you earn more you'll pay more -- but payments will always be between 10 and 20 percent of your 'discretionary' income, which the federal government defines as the difference between income and 100-150 percent of the poverty guideline, based on family size and state of residence.
But your question is also interesting because it touches on larger issues of your career path. To me, your future earning potential and overall job satisfaction should guide your career choice, even as you examine your choices for a repayment plan.
There are several repayment plans for Federal loans. The default plan is the Standard Plan, which has a fixed monthly payment. Another option is the Graduated Plan, in which payments start low and increase over time. With each of these plans, you'd pay your loans off in 10 years but your payments would be higher than an income-driven plan.
Income-driven repayment plans offer generally lower payments than either the Standard or Graduated plan and a longer repayment time frame. Eligibility depends on the type of loans you have, when you took out your loans and your current salary. Some offer loan forgiveness after 20 or 25 years. There are also several jobs in the public and nonprofit sectors that offer loan forgiveness for a shorter term. So it's worth doing a bit of research.
For an effective and easy way to get started, go to Studentloans.gov and click on the Repayment Estimator link. Once there, you can pull up all your Federal loans and input your personal information to see eligible plans, the time it will take you to pay off the balance under various plans, and the total amount of interest you'll pay on the principle.
You can also use their listed averages to get a quick and basic idea of your choices at different income levels. For instance, according to the Repayment Estimator tool, the average student loan for a four-year public college is $26,946 at 3.9 percent interest. At an annual salary of $30,000 the longest repayment period for that size loan is about 17 years. At $60,000 a year, income-driven repayment options are much more limited, but payments would still be 20 percent or less of discretionary income (in this case, although the payments are higher, the loan would be paid off in 12 years).
Also, be aware that while these repayment plans apply only to Federal student loans, not all Federal loans are eligible. However, there are loan consolidation possibilities that can make all or most of your Federal loans eligible. Studentloans.gov is also a good resource if you need to consolidate.
The question of the lack of incentive for getting a higher paying job is interesting. But I caution you not to let your loan choices drive your career decisions, for a number of reasons.
First, with time and consistent effort, you'll pay off your loans or reach the forgiveness point. Then you'll have all your salary at your disposal -- and generally, the higher it is the better. Second, you may have even greater future salary opportunities than you imagine now, so to limit yourself to a low salary is closing a door that would be better kept open.
Finally, remember that income-driven plans don't apply to private loans, which may be one reason to consider federal loans before considering private loans. If you have private loans as well, you'll want to put yourself in the best financial position possible to pay them off in a timely fashion -- which is another good incentive to go for a higher paying job.
The thought of paying off student loans can be pretty overwhelming. But take it step by step. Check out the information on Studentloans.gov and run the numbers to compare your options. And don't hesitate to contact your loan servicer, who should be more than willing to help you make the right choice.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book. You can e-mail Carrie at firstname.lastname@example.org. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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