How to make student loan payments manageable

If you are carrying a lot of student loan debt, you know how hard it is to make payments when you're paying other monthly bills, starting a family, or launching a business.

President Obama tried to ease this burden recently as he announced an expansion of his "pay as you earn" program. It caps payments on federal student loans at 10 percent of a borrower's income. After 25 years, any unpaid balance would be forgiven. If the borrower works in certain nonprofit jobs or for the government, the unpaid debt would be forgiven in 10 years.

But there are many options for paying back federal student loans, which offer more flexibility and repayment options than any other kind of debt. Here are four options for making your student loan payments more manageable:

1. Loan consolidation. This would allow you to combine all qualifying student loans from various lenders into a single loan. The main benefit is you can make a single loan payment that will be less than the total of the payments on all the individual loans you had.

The downside is that you could end up paying more in interest over the life of the loan if you extend your repayment time. Check out the tools at the Federal Student Aid web site to figure out what works best for your loan situation.

Some consolidation loan providers also offer discounts for signing up for automatic payments and making payments on time. Before you shop around for a consolidation loan, you'll want to check to see if this will lower your interest rate. The rate for the consolidation loan is usually the weighted average of the variable rates on your existing loans, typically rounded up by the next eighth of a percentage point.

2. Graduated repayment plan. This lets you start with a lower payment over a longer period of time. As your income rises, your payment increases.

3. Income-based repayment plan. With this option, also known as an IBR, the payment can be as low as zero and is capped at 15 percent of your discretionary income. If your total debt exceeds your annual income, then you're likely to qualify.

Under this option, after 25 years, any remaining loan balance is forgiven. But you may owe tax on the forgiven amount. Nearly 10 percent of all outstanding federal student loans are covered under this program and that number is rising as the word gets out about it.

4. Deferments or forbearance. Some lenders agree will agree to let you stop making payments for reasons such as unemployment, economic hardship, attending school at least half time, or serving on active duty in the military. If you have federal loans, you can defer for up to three years. For private student loans, you may be able to defer for up to one year.

This even applies when you elect to go back to graduate school. But, because the interest continues to accrue on most loans in forbearance, this option should only be used for short periods of time.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.