If you’re one of the 44 million U.S. borrowers with student debt, you know what a headache loans can be. Fortunately, federal student loans have a silver lining: They come with a variety of student loan repayment plans.
If you need to lower your monthly payments, for instance, you can apply for an income-driven repayment plan. If you want to get out of debt ahead of schedule, you can make extra payments without penalty. Although there’s no denying that student loans are stressful, this kind of flexibility can help.
But how can you choose the best repayment plan for your wallet? Here are four tips for finding the right plan for your financial circumstances.
1. Learn about the different student loan repayment plans
Your first step in choosing the right repayment plan is learning about your options.
Federal student loans come with eight different plans. For the purposes of this guide, we’ll group the five income-driven plans together, but you can follow the links to learn about each plan in full detail.
- Standard repayment: This plan spans 10 years. You’ll have the same fixed payments every month.
- Graduated repayment: This plan also gives you 10 years to pay off your debt, but with one key difference: Your monthly payments will start out small and increase every two years.
- Extended repayment: This plan lowers your monthly payments and extends your repayment term to 25 years. You can choose fixed payments, which stay the same every month, or graduated payments, which increase over time.
- Income-driven repayment: Income-driven plans cap your monthly payments at 10 to 25 percent of your discretionary income. They include:
Most of the income-driven plans end in loan forgiveness if you haven’t paid off your balance after 20 or 25 years.
If you don’t request an alternative plan, you’ll make payments on your federal loans under the standard 10-year repayment plan. But for some borrowers, the standard plan is too burdensome. For others, it’s not an aggressive enough approach for paying off debt.
Note that private student loans are different. They probably won’t come with flexible repayment plans; each lender sets its own requirements for repayment, so you’ll need to speak with them to learn about your options.
2. Determine how much you can pay each month
After learning about the different student loan repayment plans, it’s time to take a close look at your budget. Use a spreadsheet or download an expense-tracking app to get a clear picture of your monthly cash flow.
Based on your income and expenses, figure out how much you can afford to pay toward your student loans each month. Then, use a tool such as the Federal Student Aid Repayment Estimator to calculate your payments on different plans.
If you need to lower your payments…
If your student loan payments under the standard repayment plan are destroying your budget, apply for a different plan. Each has its own eligibility requirements, so factors such as your income, loan type, date of loan disbursement, and total debt might narrow down your options.
When considering changing your repayment plan, ask yourself these questions:
- Do I expect my income to rise over time? If so, you might opt for the graduated repayment plan. With this option, your payments will start low and gradually rise, but you’ll still pay off your debt in 10 years.
- Do I need long-term relief? If so, opt for the extended repayment plan or an income-driven plan, both of which lengthen your repayment term to 20 or 25 years.
- Am I working toward Public Service Loan Forgiveness (PSLF)? If you’re working toward PSLF, an income-driven repayment plan such as IBR, PAYE, or REPAYE is a good option.
- Do I have Parent PLUS Loans? If you’re a parent borrower, your options for income-driven plans are limited to ICR.
- Do I need to pause my student loan payments altogether as a result of losing my job or returning to school? If this is the case, consider student loan deferment or forbearance to avoid default.
The right plan will match your circumstances and make your monthly payments more manageable. Keep in mind, however, that if you lower your monthly payments, you’ll likely pay more in interest in the long run.
Again, if you have private student loans and need relief, you’ll need to speak with your lender. They might offer temporary forbearance in the case of economic hardship.
If you can pay more each month…
After taking a close look at your budget, you might reach the opposite conclusion: You can pay more each month and get out of debt even faster. If that’s the case, you can set up extra payments without penalty.
The Department of Education doesn’t penalize you for paying off your loans ahead of schedule, and most private lenders won’t either. You can set up recurring or one-time extra payments to pay off your debt faster.
3. Use a student loan calculator to understand interest
Once you’ve compared your budget with the various student loan repayment plans, do the math to see what each plan would look like for you. Not sure where to start? Student loan calculators can take the guess work out of the process.
For example, let’s say you owe $30,000 in loans with a 5.70% rate. On the 10-year standard plan, you can expect to pay about $328 per month for 10 years. Over the life of your loans, you’ll pay about $9,452 in interest.
But if you can pay just $50 more per month, you’ll save about $1,700 in overall interest and get out of debt 1.7 years ahead of schedule. If you can ramp up your payments to $500 per month, you’ll save over $4,000 in interest and get out of debt about 4 years early.
By revealing your total savings, these calculators can motivate you to pay off your loans faster.
But calculators will also show you what happens if you lower your monthly payments. This income-based repayment calculator, for example, gives a bird’s-eye view of your loans on IBR. It even takes annual salary raises into account.
Student loan calculators reveal the relationship between your monthly payments and the interest you pay over the long run. By crunching the numbers, you can see how your actions now will affect your finances in the future.
4. Change your plan if your circumstances change
There’s no one-size-fits-all approach when it comes to repaying student loans. The plan you choose might be different from someone else’s. Plus, your approach as a new grad might look different than it does in your 30s or 40s.
If your bills are overwhelming, an income-driven plan could be exactly what you need to lower your monthly payments and avoid default. But if you start making more money with a high-paying job or a side hustle, you could ramp up your student loan payments to get out of debt faster.
Once your finances are in good shape, you could even refinance your loans under new terms. When you refinance, you turn over one or more of your student loans to a new, private lender. You could refinance one loan or combine multiple ones. Ideally, you’ll get a lower interest rate when you do so.
Plus, you could choose new terms, perhaps lowering your monthly payments or accelerating your payoff date. If you go from a 10-year plan to a five-year one, for instance, you’ll be out of debt much faster. Just make sure to do the math so you understand exactly what your new terms will mean for your budget.
For example, let’s say you refinanced a 10-year, $30,000 loan at 5.70% interest. Your new plan has a five-year term at 4.50% interest. In this case, your monthly payments would increase by $231, but you’d get out of debt five years early and save $5,870 on interest.
Typically, the best candidates for student loan refinancing have a steady income and strong credit score. Keep in mind that if you refinance your federal student loans, you’ll lose out on federal benefits, such as income-driven repayment plans and forgiveness programs.
Choose a repayment plan that works for you
If you’re confused about the different student loan repayment plans available, you’re not alone. There are a lot of options, and each has its own pros and cons.
Careful research and a bit of patience can pay off, whether you land big savings from a new repayment plan or free up more of your money each month. Explore your options if you need some financial relief or want to pay off your debt faster.
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