ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, May 20, 1996 TAG: 9605210038
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
Many students who are graduating from college this spring can look forward to a future with at least one certainty. They soon must begin paying off the loans that financed their education.
Some people with newly minted college degrees can owe as much as $65,500, said Linda Frece, who heads First Union Corp.'s educational loan services in 12 states from Roanoke.
Those with graduate or professional credentials can face debts as high as $138,500, she said.
Many graduates owe at least some money. And now the money must be paid off with income from entry-level jobs.
But a variety of payment plans are offered by the two primary loan sources - the Federal Direct Loan Program and Sallie Mae - in which most banks are participants. They allow graduates flexibility although some plans are more expensive in the long run.
Sallie Mae also touts its three special repayment programs, which can save borrowers hundreds or thousands of dollars on their education loans.
Offered by lenders who are partners with Sallie Mae, the Great Rewards program reduces a federal Stafford loan interest rate by two full percentage points for the remaining term of the loan after the initial 48 scheduled payments are made on time.
Sallie Mae said a typical borrower with $20,000 in student loans would save $1,156 at current interest rates (8.25 percent) over a 10-year repayment term.
After the first 24 on-time payments, the so-called Great Returns program credits Stafford borrowers with an amount equal to the loan origination fees (3 percent of the loan) in excess of $250. That would mean a savings of $671 to a student who borrows $20,000 and qualifies for the benefit.
The last special program that offers special savings is Direct Repay. When borrowers authorize Sallie Mae to transfer their monthly loan payments automatically from a checking or savings account, their interest is cut by a quarter-point for as long as they remain in the plan. For the same loan and interest rate, Direct Repay would save $483 in interest costs.
Sallie Mae and the new Federal Direct Loan Program, which was started in 1994, offer four options for paying back the money.
The first is standard repayment. Loans are repaid in 120 monthly payments or in 10 years. Sometimes the period is shorter if the loan is small.
In the federal program, the number of payments is adjusted to reflect changes in the variable interest rate so that the amount of payments remain the same, according to the Institute of Certified Financial Planners. The graduate, however, can opt for changing the amount of the payments.
Sallie Mae, on the other hand, adjusts the amount of the payments each year in light of the variable interest rate.
This plan is best for graduates who find a reasonably well-paying job. Anyone with Stafford loans of $10,000 at a rate of 8.25 percent would pay $123 monthly. The total cost over the life of the loan would be $14,178.
The second concept is what the federal program calls graduated payment and Sallie Mae refers to as select step. This allows for interest-only payments during the first two years and larger payments in years three through 10.
This is obviously best for graduates making a low income who believe that they have the potential for higher earnings later. Under Sallie Mae $10,000 loan, the payments start at $69 per month but rise in the third year to $143. The total cost of the same loan would be $15,344.
A third plan is "income sensitive." The amount of the repayment is fixed at a percentage of the graduate's monthly income. Sallie Mae ranges from 4 percent to 25 percent of gross monthly income, while the federal plan tops out at 20 percent of the borrower's discretionary income.
As income rises, so do payments, but any unpaid interest is added back to the total account.
Under the federal program, the loan is forgiven if income never rises enough to pay off the principal and interest in 25 years. In such a case, however, income taxes must be paid on the forgiven amount.
Under Sallie Mae, borrowers can extend their term by one year, up to a five-year total, for every year that payments are less than principal and interest.
Anyone who takes this option and pays $69 the first year and then pays $123 for years two through 11, would face a cost of $15,543.
Sallie Mae can also grant forebearance to anyone with a low income. This allows paying less than the monthly interest, but it also contributes to higher overall costs.
Sallie Mae's fourth option provides for interest-only payments for four years instead of for two years. The $69 monthly bill would, in such a case, rise to $177 a month in years five through 10. The total cost of the $10,000 loan would be $16,012.
The final federal direct plan is extended repayment. Depending on the size of the debt, the payments can be stretched out from 12 years to as long as 30 years for loans over $60,000.
Each program allows switching among the various options to reflect changes in job and income status. Graduates also can make prepayments on the principal.
The planners recommended that borrowers pay off their loans as quickly as possible instead of extending payments. Extending payments over 15 or more years, the group said, dramatically increases the total cost of the loan.
They also said a student's family should try to save as much as possible before college. "It's almost always better to invest money that earns income rather than using the same money to pay off a loan," the planners said.
LENGTH: Long : 105 lines ILLUSTRATION: GRAPHIC:(chart) A sample of education loan programs. color.>by CNB