1. WHY SWEAT STUDENT DEBT?
Or WHY PAY BACK MORE THAN REQUIRED?
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 debtrepayment. 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 approachis 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 discussionwith my debtservicer
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

2. 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 bestyou 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 suchan 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 approachmight 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.
Christopher F. Owen
Attorney at Law
B.Sc. (Econ), J.D.
2014/Christopher Owen