5 Student Loan Repayment Options
Money Girl reveals tips on how to manage education debt, and explains 5 student loan repayment options that can help ease your financial burden – and save money.
If you’re like most college graduates, you have student loan debt that weighs heavily on your mind. For students who graduated last spring, your 6-month grace period is up – and it’s time to face your loan payments.
But never fear: in this episode, you’ll learn how to manage student loan debt, and get details on 5 student loan repayment options that can help you ease your financial burden, and save money.
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Create a Student Loan Repayment Strategy
Did you know that the average education debt load is now about $30,000 per student? No matter if you can afford your education debt or are struggling to make payments, it’s important to have a student loan repayment strategy.
The first step is to get organized and understand what you owe. There’s a central database called the National Student Loan Data System (NSLDS) that tracks federal loan programs all the way from funding through account closure. But it doesn’t include private loans—so check your statements or contact your lender or school for information on those.
You can use a handy app such as Tuition.io or Student Loan Hero to aggregate your student loan information. Or create a spreadsheet with the following information for each of your loans:
- Type of loan, such as a federal or private
- Repayment date, which is when your first payment is or was due
- Interest rate and type, such as variable or fixed rate
- Servicing company that handles your loan and collects your payments (it may be different than the lender)
- Servicing company contact information, such as phone number and website
Having all of your loan information in one place will make it easier to choose the best repayment option.
What to Do If You Have Trouble Paying a Student Loan
If you have trouble paying your student loan, it’s very important to contact your loan servicing company as quickly as possible to discuss your options.
You probably know that if you don’t make payments or you pay late, that gets reported to the nationwide credit bureaus and will damage your credit scores. Additionally, legal action can be taken against you, including garnishing your wages and withholding your tax refunds.
Even if you have major financial problems and declare bankruptcy, student loans may not be discharged. That’s why student loans are a much more serious debt than many people realize.
But the good news is that you may be able to get some relief by changing your repayment plan.
See also: How to Use Upromise to Pay for College
5 Student Loan Repayment Options
If saving money is your main objective, then stick with standard repayment or choose the most aggressive plan that your financial situation allows.
Here are 4 repayment options for federal student loans and 1 for private loans:
Option #1: Standard Repayment
Standard repayment is the plan you get automatically for a student loan, unless you choose a different repayment option. In this option, you’re required to pay a fixed amount per month for the life of your student loan, which is typically 10 years. (If you have a consolidated loan, you can stretch out the term to 30 years, depending on the total amount you owe for your education, including all federal and private loans.)
Of all of the federal student loan repayment options, this one is the best because it charges the least interest over the life of the loan. Although your monthly payments may be higher than payments required for other plans, you’ll save the most money over time with standard repayment.
Option #2: Graduated Repayment
If you don’t end up earning as much as you expect right after graduation, the graduated repayment plan may be a good option. This plan gives you a low interest rate for your student loan that goes up every 2 years. That means you start out with a low payment that increases little by little every 2 years.
You can repay a graduated student loan for up to 10 years—or up to 30 years if you have a consolidated loan, depending on the total amount of education debt you have.
Option #3: Extended Repayment
But what if you can’t afford loan payments that increase in future years? In that case, extended repayment may be your best option. It generally gives you lower payments than either the standard or graduated repayment plans.
To qualify for extended repayment you must owe more than $30,000 for any one type of federal loan. You can opt to pay fixed or graduated payments (which start low, but increase every 2 years) for up to 25 years.
Option #4: Income-Driven Repayment
If the extended repayment plan still doesn’t make your student loan payment affordable, there are more options based on your income, family size, and type of loan.
If the extended repayment plan still doesn’t make your student loan payment affordable, there are more options based on your income, family size, and type of loan. However, you must provide tax returns or proof of income to determine your eligibility.
Additionally, you may be required to pay income tax on any amount of debt that is forgiven. This may happen if you still have an outstanding loan balance at the end of your repayment period.
For example, let’s say you owe $40,000 and make payments over a 20-year term, but still have $5,000 remaining. You wouldn’t have to pay the left over amount, but it would be considered taxable income.
There are 3 main types of income-driven repayment plans:
- Income-Based Repayment (IBR) Plan: allows you to pay 15% of your discretionary income over 25 years. Starting July 1, 2014, new borrowers can pay less, 10% of discretionary income, but over a shorter 20-year period. You’re eligible as long as the payment isn’t more than what you’d pay for a standard repayment plan.
- Pay As You Earn Repayment Plan: allows you to pay 10% of your discretionary income over 20 years. It’s different from an IBR plan because your payments change as your income changes. You’re eligible as long as the payment isn’t more than what you’d pay for a standard repayment plan.
- Income-Contingent Repayment (ICR) Plan: allows you to pay the lesser of 20% of your discretionary income or what you’d pay with a fixed plan over a 12-year term. The repayment period for an ICR plan is 25 years and your payments change each year as your income, family size, and total education debt changes.
Option #5: Private Lender Repayment
The last repayment option for a private student loan depends completely on the flexibility of your lender. Most typically offer few alternatives besides a fixed-rate plan that requires repayment over a 10- to 25-year term. That’s why I recommend that you tap out federal loan options before turning to private lenders.
How to Choose a Student Loan Repayment Plan
If saving money is your main objective, then stick with standard repayment, or choose the most aggressive plan that your financial situation allows. But never agree to a repayment plan that you really can’t afford.
If your financial situation improves, consider refinancing or consolidating your private and federal loans using a lender like SoFi. Getting a lower interest rate can save you a huge amount of money over the life of your loans. The average SoFi refinance borrower saves about $12,000!
So be sure to revisit your student loan repayment strategy on a regular basis to make sure it’s still the best option for your financial situation.
Shannon McLay is a contributing writer for this article. She’s the author of Train Your Way To Financial Fitness and is the Managing Editor for Money Saving Pro. For more information about student loan repayment options visit www.moneysavingpro.com/student-loans.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
