Why aggressively repay student loans now if you might not have to repay them later?
You’d be forgiven for asking that question. You’d even be excused for going further down the rabbit hole, imagining a whole series of apocalyptic scenarios: the Federal Student Aid (FSA) system collapsing, the stock market crashing with it, followed by mass forgiveness.
Although such a student loan bailout is fair to wonder about, it’s dangerous to hinge your hopes on one. That said, there are a couple of situations where dragging out your repayment does make sense.
Why it’s dangerous to delay student loan repayment
An experienced journalist representing an activist group’s blog recently asked me this question: Why should borrowers repay their debt if climate change is ending the world?
I coughed audibly into the phone. Sensing my surprise, he pointed to the genuine effects of global warming and concluded that consumers strapped with student loans should focus on more important priorities, such as protecting the planet.
In fact, there are many possible events that could make student loans moot, each with varying degrees of likelihood — ranging from some new sort of student loan emancipation program to catastrophic climate change, revolution or even world war.
But while it’s true that anything could happen down the road, you probably don’t want to build your life around it. More likely than not, your outstanding balances will still be outstanding years from now if you delay repayment.
Here’s the danger: If you delay repayment but your debt doesn’t disappear on its own, you could be left staring down the barrel of an even larger balance, thanks to accrued and capitalized interest, plus late-payment, collections or court fees. Your personal financial life would be in a mess.
Say you have $30,000 worth of loans, due to be repaid at 6.00% interest. Neglecting the debt for a single year would balloon your balance closer to $32,000. Ignore it for five years, and you’d then be staring at almost $40,000. You can see where this is headed.
Two scenarios to slow-play your student loan repayment
That’s not to say that attacking your debt with reckless abandon is always the answer. There are two cases in particular when it might be wise to take a snail-like approach to your student loans:
1. You can’t afford your monthly payments
If you fall into this bucket, you might be tempted to ignore your loan servicer or lender’s emails, letters and calls hounding you for repayment. But instead of skipping out on your minimum monthly dues, consider your options to pause or reduce them.
On the federal loan front, you could apply for a deferment or forbearance. The temporary break in your repayment, which could span up to three years, would give you some breathing room in your budget. In some situations, though, this might result in interest accruing onto your balance until you resume repayment.
Another option would be to decrease your federal loan payment amount to a more manageable figure by switching from the 10-year standard repayment plan (to which you were assigned originally) to an income-driven repayment plan (IDR). IDR plans cap your monthly payment at a percentage of your discretionary income, which you would recertify annually.
Private student loans, however, are a little different. Adjusting your minimum monthly payment on your private loans (if you have any) isn’t always possible. Contact your lender to review your options — it’s still possible your bank, credit union or online creditor could offer an economic hardship forbearance.
You might also consider student loan refinance: Switching to a longer repayment term, say from 10 years to 15, could lower your monthly obligation. Note that this could also result in you paying more interest over the life of the loan, though you might also potentially score a lower interest rate on the refinancing to offset this.
2. You’re working toward legitimate federal loan forgiveness
One benefit of IDR plans for federal loans is that your remaining balance would be forgiven after 20 or 25 years. That’s nice to have going for you, but it’s not always a money-saver — that is, unless you earn a low wage, as it will likely keep your payments similarly low for two decades.
You’re more likely to find faster savings via programs like Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF), which take five years and 10 years, respectively, to achieve.
Say you have that same $30,000 in federal loans to be repaid at 6.00% interest. Let’s also assume that you earn about $50,000 per year working for a PSLF-eligible employer. By only paying the minimum payment for a decade on an IDR plan, you could receive close to $8,000 of forgiveness.
Public Service Loan Forgiveness Calculator
If you had more aggressively repaid your five-figure debt, there might not be much or anything left to be forgiven at the 10-year mark — hence, the slow-play strategy works in this case.
But even if you’re not a teacher or you don’t work for a PSLF-eligible employer, it’s still worth investigating other student loan forgiveness programs. If you find one that fits, it could be a legitimate reason to slow down your repayment. (However, keep in mind that there are some risks involved with PSLF.)
It’s OK to play it slow — but do it for the right reason
Yes, there are more critical issues in the world than your student loan debt, such as your health or even that of the planet. And, yes, it’s remotely possible that government legislation or another macro event could ease or erase your loan burden down the road.
But avoid passing the buck on your education debt now in hopes of a bailout later. By managing your loans in the context of everything else occurring in your world, you can keep them current and make sure your financial life stays on track.
If you’re still attracted to the idea of slow-playing your student loans, consider the option of being strategically passive (or extremely aggressive) in repayment.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.50% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.49% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.48% effective April 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.49% – 7.27%1||Undergrad & Graduate|
|2.49% – 6.65%3||Undergrad & Graduate|
|2.49% – 7.41%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.49% – 7.11%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|