How to Decide Which Student Loan Repayment Plan Is Best for You?

student loan debt

Across the United States, the cost of college and graduate school has risen dramatically, leaving many people in the unenviable position of paying back substantial student loans.   

This can be a burden for many borrowers, particularly those who are just starting out and are struggling to get started with a low salary. Having a monthly payment of several hundred dollars or more can be difficult to manage with an entry-level position and competing financial responsibilities such as rent, a car payment and other expenses, such as utilities, cell phone bills and more.

Fortunately, for many borrowers, there are alternative ways to pay back your student loans. For graduates with federal student loans, there are a number of options available, especially if you are having a hard time making your payments. Some programs offered by the United States Department of Education may even involve student loan forgiveness. For borrowers with private student loans, there are fewer options, but you may be able to take advantage of refinancing or other alternatives specific to your lender to help you manage your payments and stay on track with your student loans.

Income-Driven Repayment Plans

If you have federal student loans and a relatively low income, then you may qualify for an income-driven repayment plan. These plans cap your monthly student loan payment at a percentage of your monthly discretionary income (from 10 to 20 percentage), but there is a significant catch: the length of your loan is extended from 10 years to 20 or 25 years. After you have completed this term, the remaining loan balance is forgiven.

The benefit of income-driven repayment plans comes in the form of an immediate drop of your monthly payment amount, and the possibility of having at least part of your student loans forgiven. But the increased loan term means that you will pay more in interest than you would with a standard ten year loan payment term, and you would owe taxes on any part of the loan that is forgiven. For this reason, income-driven repayment plans should only be considered if you are at risk of going into default — unless you work in the public sector.

If you have a job in the public sector, then you may be eligible for the Public Service Loan Forgiveness Program on top of the income-driven repayment plan. Under this program, if you make 120 payments, the balance of your student loans will be forgiven, tax-free. By signing up for both the income-driven repayment plan and the Public Service Loan Forgiveness Program, you will be paying the lower monthly amount and having the remaining loan balance forgiven after just 10 years of payments. That makes this plan highly advantageous for anyone in the public sector, such as teachers, public defenders and police officers.

Standard 10 Year Repayment Plans

If you take out federal student loans, the standard repayment term is 10 years. If you can afford the monthly payments for your student loans, you should stick to this payment term, because you will pay far less in interest than if you extend the loan term through consolidation or by picking a different repayment plan.

Refinancing Private Student Loans

Many borrowers have a combination of both federal and private student loans. In many cases, these private student loans have a high interest rate, or a variable interest rate. If you have private student loans, consider refinancing these loans as a way to reduce your interest rate, switch from a variable interest rate to a fixed interest rate or even to reduce your payment term to pay off your loan sooner. By reducing your interest rate and generally shortening your loan term, refinancing your private student loans can help you save money and lower your monthly payments. Refinancing works by using a new loan to pay off your existing loans, with a new interest rate based on your application.

To qualify for a refinanced student loan, lenders will evaluate you credit score, income and other factors. Rates for refinancing vary between 2 and 9 percent; borrowers can evaluate lenders via online comparison tools on sites. If you do have federal and private student loans, be aware that refinancing them together will result in losing the ability to access the benefits of federal student loans, such as income-driven repayment plans, loan forgiveness, deferrals and forbearance.

Repayment Plans with Private Lenders

While private student loans do not offer the same benefits as federal student loans, lenders do not want borrowers to go into default. To ensure that borrowers can still make their payments, some private lenders offer options for payment plans to make sure that borrowers can pay off their loans. If you are struggling to make your monthly private student loan payments, contact your lender to find out if they offer any payment programs or modifications that may help you meet your obligations.

Choosing the right repayment plan can be critical to paying off your student loans. If you are having trouble making payments, contact your student loan servicer to find out if there is a better repayment plan to meet your needs.

Guest author Drew Cloud started The Student Loan Report as a side project with the focus of educating readers about student loans. In his eyes, financial literacy contributes to the huge gap (a $1.4 trillion gap) between borrowers and their obligations. With any luck, that gap will get a little shorter with The Student Loan Report!
  • May 15, 2017
  • Debt

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