How to pay back your student-loan debt, no matter where you start or what type of loans you have
Paying back your student loans can seem daunting as you wade into adulthood.
Your options for repayment vary depending on whether you have federal loans, private loans, or a mixture of both, but the good news is that you probably aren't beholden to a one-size-fits-all strategy.
To some degree, you control how much you pay each month and how long you'll be making payments. Enacting a plan early can help you save time and money in the long run.
Here's how you can pay back your student loans.
1. Choose a federal loan repayment plan.
Anyone with federal student loans has several repayment plans to choose from. You can compare them all on the US Department of Education website or keep reading for a summary.
In most cases, you'll have a six-month grace period after graduating or dropping to below full-time enrollment to choose a repayment plan and get your financial ducks in order. Whether you have a subsidized or unsubsidized loan will determine whether your balance accrues interest during your grace period.
If you want to pay off your loans in 10 years or less ...
The default plan for direct loan borrowers is the Standard Repayment Plan. Under this arrangement, you'll make fixed monthly payments to your loan servicer for up to 10 years. The amount you initially borrowed (your principal) and your interest rate will determine the size of your monthly payments and how long they last.
Keep in mind that you can always contribute any additional cash to pay your balance off earlier. Just don't pay less than the minimum, or you'll risk delinquency or default.
If you want to start off making small payments...
If you'd rather start with lower monthly payments while you gain your financial footing, the Graduated Repayment Plan may be a good option. You'll still pay your federal loans off within 10 years, but the monthly payments will start small — never less than the interest accruing between payments — and then increase every two years.
Note that under this plan you'll ultimately pay more toward the loan than you would with the standard repayment plan thanks to interest.
If you have a high balance and want to keep your payments low...
You can also choose to stretch your repayment period up to 25 years with the Extended Repayment Plan.
To qualify for this plan, you need to have more than $30,000 in direct loans. Your monthly payments will be relatively low, but you'll wind up paying more in interest over the life of the loan.
If you want your monthly payments to be tied to your income...
Federal borrowers have access to five different income-driven repayment plans.
- Revised Pay As You Earn Repayment (REPAYE)
- Pay As You Earn Repayment (PAYE)
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Income-Sensitive Repayment
Under each plan, you'll be required to pay at least 10% of your income to your student-loan servicer. The monthly payment is recalculated each year based on updated income and family size. In most cases, any remaining balance on your loan after 20 to 25 years will be forgiven, but you'll have to pay income taxes on that amount.
If you work in public service...
The US Department of Education offers some relief to borrowers who work for the government or a nonprofit under its Public Service Loan Forgiveness (PSLF) program. After completing 120 monthly loan payments (about 10 years) while working full-time in public service, any remaining balance on direct loans will be forgiven.
To qualify for the PSLF program, you have to start with an income-driven repayment plan.
If you're a full-time teacher...
Teachers who work full-time at qualifying low-income schools or education agencies for at least five consecutive academic years are eligible for full or partial forgiveness on their remaining direct loan balances.
If you taught special education or high-school math or science, up to $17,500 could be forgiven. If you taught in other subject areas, the maximum amount is $5,000.
2. Choose a private loan repayment plan.
If you have private student loans, your options for repayment probably won't be as wide ranging or flexible. Largely, your options have to do with whether, and how, you'll start paying your loans while in school.
Not all private student lenders offer the same menu of repayment plans, but the most common types are immediate repayment, interest-only repayment, partial interest repayment, and full deferment, according to Credible.
If you're able to start repaying while in school...
An immediate repayment plan will require you to begin making fixed monthly payments right after your loan is disbursed. You'll save on interest this way, but it's not always the most realistic option for cash-strapped students.
If you have some cash to spare...
An interest-only or partial-interest repayment plan can keep your balance from growing too quickly (or at all) beyond what you initially borrowed. You'll pay enough to cover the interest that's accruing — or a portion of it — while in school, leaving your principal balance alone until after you've graduated.
If you can't make payments until after graduation...
A full deferment will allow you to put off repayment until after you've graduated, but beware that interest will continue to pile up in the meantime.
3. Consolidate federal loans.
If you have several federal student loans, you can consolidate them at no charge at any point into one loan, with a fixed interest rate and a single monthly payment. The interest rate is the weighted average of the interest rates on each of your loans, rounded up to the nearest one-eighth of a percent.
Consolidation is a good strategy for streamlining payments and even lowering the monthly amount due. You can then choose a new repayment plan for the consolidated loan.
Unfortunately, you lose some benefits when you consolidate federal loans. If you've already made payments toward public service forgiveness, for example, your count will restart when you consolidate. Also, the outstanding interest on each of your loans will be rolled into your principal balance, meaning your total repayment amount over time will increase.
4. Refinance your federal or private loans.
Refinancing is a form of consolidation that can help streamline student-loan payments and, ideally, save you money.
When you refinance, you're getting a new loan from a private lender to pay off all your outstanding loans. Then you'll make a single monthly payment to pay off the new loan.
The primary benefit of refinancing is locking in a lower interest rate or shortening your repayment period, but some borrowers also use refinancing to relieve a cosigner of their debt obligation. It's possible to refinance federal and private loans together, if you have both, but you'll lose federal benefits like income-driven repayment, deferment, and forbearance.
You can apply for a refinancing loan at no charge through a private lender, but keep in mind that your options will vary based on your credit history and debt load.
5. Find an employer who offers repayment assistance.
It's not uncommon for employers to offer student-loan repayment assistance as a benefit to employees. The Employee Benefit Research Institute found that nearly one-third of the employers it surveyed in 2018 said they already offer or plan to offer an employer-paid student-debt program.
From trading in unused vacation days to matching contributions to loans 401(k)-style to offering interest-rate discounts for refinancing, companies are getting creative in helping workers tackle one of the millennial generations' biggest financial stressors.
6. As a last resort, consider deferment or forbearance.
If you're in a financial rut and can't make the minimum payment on your federal loans, you may be able to put your repayment obligations on hold through deferment or forbearance (some private lenders offer this option too). You may also be able defer payments if you go back to school for another degree or take an internship.
Deferment and forbearance are very similar ways to pause or reduce your monthly payments, with a few differences. For one, forbearance is more temporary — 12 months at most. On the other hand, loans can be deferred for up to three years.
In both cases, interest will still accrue and be added to your principal balance when you resume payments. That is, unless you have subsidized federal student loans and Perkins loans, in which case the government takes care of paying your interest in deferment.
You have to apply for deferment or forbearance; it's not available to just anyone. If you're unsure whether you qualify, call your student-loan servicer to talk through your options.
This article was written by Tanza Loudenback from Business Insider and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.
