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One question to ask yourself before you sign up for graduate school is do you really need that degree given what it will cost you. As an example of this about 16% of master's degrees are in education and these people end up with a median debt of $50,879. Since the yearly salary for a public school teacher averages just $57,830 it becomes clear why graduating owing $50,879 is going to create a real burden. People that pursue advanced degrees with the idea that they are going to be able to make enough to pay back their loans may find this is not necessarily true.
Of course, a master's degree will pay off in many areas. In fact, people with a master's degree will earn on the average about 20% more than a person that has just a bachelor's degree. And if you were to get a professional degree, you should be able to earn around 55% more.
Easing the burden
This past June Pres. Obama issued an executive order that expanded a program called Pay As You Earn so that about 3.1 million more borrowers are now eligible. The good news of this program is that it would limit your monthly federal loan payments to 10% of your discretionary income and any any remaining debt would be forgiven after 20 years.
Depending on the type of federal loans you have you might not be eligible for Pay As You Earn. Fortunately, there are two other types of income-driven repayment. They are Income-based and Income-contingent Repayment. Like Pay As You Earn these two programs are tied to your income and family size. Also like Pay As You Earn you must submit documentation every year regarding your income and family size so that your payments could go up or down accordingly.
If you were to choose Income-based Repayment you would see your payments capped at 15% of your discretionary income. With Income-contingent Repayment your payments would also be capped at 15% of your discretionary income. The major difference between these two programs is their eligibility requirements. Income-based Repayment works with only certain types of federal loans while you could have virtually any kind of federal student loan and still qualify for Income -contingent Repayment.
Note: Discretionary income is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and your state of residence.
The dark side
The dark side of income-based repayment is that theoretically speaking you could borrow $500,000 to pay for a law degree or medical school and it wouldn't make any difference because you would never have to repay the entire amount. Just make your monthly payments for 20 years and whoosh! You'd see thousands of dollars of debt vanish into thin air. The other downside of this is that it could encourage graduate students to borrow even more than they currently are borrowing because, what the heck! They’ll never have to pay back all that money anyway.
Paying off those student loans
Do you know the difference between a student loan and a personal loan? It's simple. You can get rid of a personal loan by filing for bankruptcy. But not student loans. Like alimony, child support and spousal support they cannot be dismissed through a chapter 7 bankruptcy. Regardless of how much you owe on your student loans the best thing you can do is pay them off. Our federal government can get very ugly if you default on a student loan. It could be turned over to a debt collector that could garnish your wages without even taking it to court. You could see a percentage of your income tax refund seized and you could even be prohibited from getting a professional license. You could also see your debt grow because of additional interest, late fees, collection fees, court fees, attorney's fees and any other costs associated with collecting your debt.
One good thing about student loan debts is that there are a variety of repayment options available. If you're in Standard 10-Year Repayment and are having a problem meeting your payments you could switch to, say, Graduated Repayment or Extended Repayment. Plus, as noted above, there are three "income-driven" programs where your payments would be tied to your discretionary income. Or you could get a Direct Federal Consolidation loan where you’d then have to make just one payment a month and it should be considerably less than the sum of the payments you are currently making. The interest on one of these loans should also be less than some of your current loans. The way it's calculated is by taking the mean average of the interest payments you’re currently making and then rounding it up to the nearest 1/8th of a percent. This would be a fixed rate loan as the interest rate would never charge and you could have as many as 30 years to repay it.