When it comes to money, one thing is certain: there’s no one-size-fits-all solution. This is especially true when it’s time to pay off your student loans.
How exactly are you supposed to decide what payoff strategy is best for you in a world of so many options?
Making that determination can be tricky, for sure. But we can help! If you’re trying to decide which student loan repayment plan is going to work for your situation, here are the questions you need to ask yourself.
How to pick the best student loan repayment plan
1. Do you work in public service?
This is a multi-layered question. If you work in public service, you may be eligible for Public Service Loan Forgiveness (PSLF). To qualify for PSLF, your employer must fall into one of these categories:
- Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code
- Any local, state, federal, or tribal government organization
- Certain not-for-profit organizations with qualifying public services
- Certain volunteer organizations, like the Peace Corps and AmeriCorps
If your employer qualifies and you expect to work for them full-time for at least 10 years (see these surprising requirements for PSLF), your best bet is probably to consolidate eligible loans through the Federal Direct Consolidation Loan program and get on an Income-Driven Repayment plan.
Make sure you certify your payments each year to ensure they count toward forgiveness.
2. Are you having trouble making payments?
If you current income isn’t enough to support your monthly student loan payments, consider an income-driven plan such as IBR or REPAYE.
These programs cap your monthly payment as a percentage of your income. It’s even possible to qualify for a monthly payment of $0 (however, keep in mind that interest may still accrue and roll into your principal balance, depending on the program).
Plans like ICR and REPAYE are tricky in these circumstances because there’s no cap on the monthly payment amount, so you could end up paying more per month than you would have under the Standard Repayment Plan. Of course, if you’re in that situation, making the monthly payments shouldn’t be a problem as long as your other budget categories aren’t out of control.
TL;DR: If you are having trouble making payments and don’t qualify for PSLF, but do qualify for IBR or PAYE, sign up. If your only income-driven options are ICR or REPAYE, proceed with caution — especially if you expect your earning power to increase rapidly.
3. What payoff style motivates you?
If you have multiple loan balances with multiple lenders, then your personality can play a large role in selecting the best student loan repayment plan. For example, will you opt for the debt snowball or the debt avalanche?
Under both methods, you pay the minimum on all loans except one, where you funnel all your extra payments. If you choose the snowball, you direct extra funds to the loan with the smallest balance first; if you pick the avalanche, those funds are put toward the loan with the highest interest rate. The former is for those who need a quick win, and the latter for those who want to pay the least interest over time.
On the other hand, if having so many accounts (and due dates!) drives you crazy, consolidating or refinancing might be the best choice for your sanity. Fewer monthly payments means less to track, and less likelihood that you’ll make a mistake.
4. Are your loans federal, private, or a mix of both?
Federal loans come with a variety of benefits like PSLF eligibility, access to IDR plans, clear guidelines for deferment and forbearance, and more.
However, it’s currently impossible to lower interest rates for federal loans. To lower your student loan rates, you’d have to refinance through a private lender — which means permanently giving up those federal loan perks, since the new loan is a private one.
If you went through a private lender to fund your education, not only do your loans not come with federal benefits, your interest rate may be double-digits high and your customer service experience may be somewhat … lacking. In that case, refinancing with a reputable private lender may help lower your interest rates and monthly payment as well as improve your experience with your servicer.
Check out our list of top lenders to see how much you could save.
If you’ve got a mix, it may be best to keep your federal loans federal and your private loans, well, private. Remember that while you can refinance all your loans into a single account with a private servicer, you don’t have to. Simplicity is attractive, but it doesn’t always save you money when it comes to student loan repayment strategies.
5. Do you anticipate a major life event in the near future?
If you’ve got a big milestone on the horizon — like getting married, buying a house, or having children — then anticipate as best you can how your financial situation will change as a result.
The student loan repayment plan that seems best for you today may not be ideal for the long haul. And while sometimes changes in your life are unexpected, if you can predict them then it seems silly not to plan accordingly.
Of course, there are many more questions you could ask yourself when trying to identify the best student loan repayment plan. However, if you answer these, then you’re off to a strong start. Good luck!
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