Student Loan Repayment Options: How to Pay Off Your Debt
Graduates will receive their first bill for their loan 6 months after graduation, regardless of whether or not they have found a job.
It’s a subject that few students want to talk about, and few parents want to think about, but the time will come when students will have to repay their loans.
There are several different methods of repaying your loans, including new options introduced in the past few years. You should gain an understanding of what options are available to you, and the pros and cons of each. Note that these options are only available for federal loans, and do not apply to private loans.
The Standard Repayment Plan is what most borrowers will be put on automatically. These are payments of fixed amounts of at least $50 per month. Making regular payments will have you paying down your loan by 10 years. For students who want to eliminate debt quickly and don’t wish to pay a lot towards interest, this is your best option. However, some students have found that their minimum payments are too large to handle. If this is the case there are a variety of other ways to pay down debt.
The Graduated Repayment Plan allows you to make smaller payments at first, and then gradually increases payments so that you can still pay off your loan by 10 years. The upside of this is that it allows you to make lower payments when you’re first starting out your career and you may not have a lot of extra income. The downside is that you’ll end up paying more in interest over the lifetime of loan.
The Extended Repayment Plan involves fixed or graduated payments that can be extended for up to 25 years. Your minimum monthly payment will be lower, but will end up paying much more in interest over the long-term. You also have to meet certain eligibility requirements.
The Income-Based Repayment Plan is available to students who display financial hardship. This plan allows you to make graduated payments of 15% of your discretionary income. After 25 years the remainder of the loan can be forgiven.
The Pay As You Earn Repayment Plan is a little bit different than the Income-Based Repayment Plan. It allows you to make payments up to 10% of your discretionary income for up to 20 years. If after 20 years you have not pay off the loan you may have the remaining balance on your loan forgiven. Students also have to display of financial hardship for this option, and it is only available for those who became borrowers after Oct 1, 2007.
The Income Contingent Repayment Plan is yet another income-based plan in which payments are calculated based on your adjusted gross income, family size, and the total amount of your loans. Payments may vary every year. In this plan you can take up to 25 years to pay off the balance of your loan, at which time the remainder may be forgiven.
The Income Sensitive Repayment Plan is a ten-year repayment plan, but is based on your annual income. This will allow you to still pay off your loans in a timely fashion, but it adjusts payments based on your income. You will end up paying more interest on this loan than you would in a standard repayment plan, however again this option may be good for young professionals who are struggling to make payments.
There are many options for repayment and the choices can be a little confusing for a recent college grad. Your best option would be to stick with the standard repayment plan unless you find yourself unable to make payments.
What If I Can't Make A Payment?
A loan is considered to be delinquent the first time you miss a payment. Your loan is considered in default if you fail to make a payment for 270 days. During the time you are not making payments interest is continuing to grow on your loan, making it even more difficult to pay off. Your credit rating will be negatively affected, and you may end up being contacted by debt collectors. If you are struggling to make payments contact your federal loan provider right away and discuss alternative options.
Can I Defer my Payments?
You may be able to temporarily postpone or lower your payments for certain reasons. These include going back to school, joining the military, or experiencing some form of financial hardship. During deferment, you are able to cease making payments while the government covers your interest. Forbearance allows you to stop making monthly payments for a certain amount of time without going into default, however during that time interest will still accrue.
Should I Refinance?
Federal loans and private loans can be refinanced to either reduce your monthly payment, or to reduce your interest rate and save money. Refinancing does mean that you may lose some of the repayment methods and options to achieve loan forgiveness.
Should I Consolidate My Loans?
Consolidation is a way for a student to manage multiple federal loans by combining them into one with one monthly loan payment. Consolidation can lower your rates, however if you add time to your repayment plan you will end up paying more interest in the long run.
Is There Any Way to Get Out Of Loan?
It is notoriously difficult have a student loan canceled, as they are unable to be discharged through bankruptcy like other types of loans. In very rare cases your loan may be discharged due to disability or extreme hardship. Another way to get out of loan is if the school where you received your degree closes.
There are a few programs in place which allow public workers such as teachers to have their loan forgiven after a certain amount of time. You can learn more about these options here.
Bottom line? Once you sign up for a loan you most likely going to be stuck with it for a long time. Even if you qualify for graduated or income repayment option, you could still be making payments on your loan 25 years after graduation! When you start looking at colleges paying off student loans seems very far away. However, students and parents do well to understand their options before they even sign up for their first loan. Happy college hunting, and good luck!
For more information go to studentaid.ed.gov/repay-loans