I have $60,000 in student loans. Paying them off in 15 years costs about $560/month. My total payments will be just over $100,000. Two problems arise when dealing with debt this large. One, how am I going to pay this monthly bill? Two, how will I contribute to my savings over the next 15 years? Here are some lessons I have learned about loans that I wish I had known earlier:

Forbearance = A Loan By Any Other Name

I thought it would be a good idea to forbear my loans for as long as possible so I could get settled and find a decent job. The accumulated interest was worse than I thought. Interest accrued during your forbearance is applied to your principal balance, which raises your monthly payments in the future. My actual forbearance choices were kind of complicated, but for simplicity’s sake let’s assume I got a one-year forbearance and all my loans have a 7% interest rate. The total interest accrued for one year is $4,350. After 15 years of paying off this extra balance on my loan, the total cost of this one-year forbearance will be $7,000. In the long run, I am spending $7,000 to put off paying $6,700 for one year. That sucks. Apparently forbearance is just a loan that pays the interest of your other loan.

Graduated and Interest-Only Plans Also Suck But Are Better Than Forbearance

Citibank and Sallie Mae both offer the option of making smaller payments initially and then larger payments later. This is helpful if you’re desperate, but you are still paying more money to put off paying your student loans. It costs less than Forbearance in the long-run for two reasons. Firstly, the accumulated interest is not added to your total balance so you don’t have to pay interest on your interest. Secondly, the total length of repayment is decreased by the amount of time you are making interest-only payments. With this simplified loan at 7%, paying interest-only (350/month, instead of 540) for the first year of my 15-year repayment would cost $1000 in the long run. (The $4200 payed in interest during the first year is partially offset by the $3200 saved by paying the loan off in 14 years instead of 15 years.) Keep in mind that the payments during the final 14 years would be $20 higher per month (which is already calculated into the $1000) because of the shorter payoff time. Essentially, you’re doing something bad (putting off paying your loans) by promising to do something good later (paying off your loans in a shorter period of time.)

Be Careful of Consolidation Offers 

Consolidation only offers three benefits: it simplifies paying multiple loans into a single loan;  you can potentially lock in a low interest rate (more on that later); and it lets you extend your pay-off time.

This last benefit is of course double-edged. The longer you are paying off your loans, the more you have to pay in the long run. My solution is to make payments as if I were required to pay it off in 15 years, not 30, and hope to pay it off early. It is important to specify that the extra money goes toward reducing your monthly payments and NOT decreasing the length of your payment term. Otherwise if there is an emergency you will not have the option of making significantly lower payments for a while.

Locking in low interest rates is kind of odd. I locked in a fixed rate for my federal loans before they went into repayment, which was excellent because the rate is lower when your loans are being differed while you are in school. My private loans were more complicated and I ended up consolidating later. My first offer was crummy because the fixed rate would have been significantly higher than my current rate. I then checked with another lender (Sallie Mae) and with a cosigner was able to get a fixed rate lower than my current unconsolidated variable rate.