November 7, 2019

Repaying Student Loans

If you’ve got student loan debt, you’re not alone. There are more than 43.6 million borrowers with student loans, and an average balance of around $38,000 in federal and more than $40,000 in private loan debt. Paying back your balance—no matter the amount—can feel overwhelming. Focus first on finding a repayment path that works for you.

Grace Period

First, the good news: most federal student loans come with a six-month grace period before repayment begins. (With a Perkins loan, the grace period can be as long as nine months.) The idea behind the grace period is to give you time to get settled post-school and figure out a repayment plan.

Keep in mind that for many loans, interest still accrues during the grace period and is added to the outstanding balance. Some circumstances impact your grace period, like if you enter active duty military service, re-enroll in school at least part-time, or consolidate your loans.

Repayment Plans

You’ll likely be assigned a repayment plan for your federal student loans, but you can change plans anytime, for free, depending on what works for your financial situation. It’s smart to think through all of your eligible options, rather than simply picking the lowest monthly payment or the quickest payoff. For instance, some plans include loan forgiveness after a set amount of payments, or offer flexible payments based on a percentage of your income. See details on all of the repayment plans at https://studentaid.gov/manage-loans/repayment/plans.

Fixed Repayment Plan Options

Standard Repayment Plan

Eligibility: All borrowers
Monthly Payment: At least $50 minimum
Repayment Period: Between 10-30 years
Pros: Pay back loan quickly and pay less overall
Cons: Fixed payments don’t reflect current income

Graduated Repayment Plan

Eligibility: All borrowers
Monthly Payment: Payments start lower and increase over time
Repayment Period: 10 years
Pros: Ideal if you expect income to increase in the future
Cons: Plan will likely cost more overall than standard repayment plan

Extended Repayment Plan

Eligibility: Most borrowers qualify, but if you have direct loans, you must owe more than $30,000
Monthly Payment: Fixed or graduated payments
Repayment Period: Up to 25 years
Pros: Payments are lower than with the standard or graduated plan
Cons: Plan will cost more overall because of increased repayment period

Income-Based Repayment Plans

SAVE (Saving on a Valuable Education) Plan

Eligibility: Anyone with eligible federal student loans. Borrowers who were on the former REPAYE Plan were automatically enrolled in SAVE.
Monthly Payment: Based on family size and income
Repayment Period: 20-25 years
Pros: If you make less than $32,800 a year as a single borrower, your monthly payment is $0
Cons: The higher your income, the more you’ll pay.

IBR (Income-Based Repayment) Plan

Eligibility: Borrowers with high debt relative to income
Monthly Payment: 10-15% of discretionary income but never more than what you would pay under standard repayment plan
Repayment Period: 20-25 years
Pros: Outstanding balances are forgiven if you haven’t repaid the loan in full after 20-25 years, depending on when you received your first loans
Cons: You must update your income and family size every year, even if they haven’t changed

ICR (Income-Contingent Repayment) Plan

Eligibility: Direct Loan borrowers
Monthly Payment: The lesser of 20% of discretionary income or the amount you’d pay on a repayment plan with a fixed payment over 12 years
Repayment Period: 20-25 years
Pros: Outstanding balances are forgiven if you haven’t repaid the loan in full after 25 years. Good for people seeking Public Service Loan Forgiveness (PSLF)
Cons: You must update your income and family size every year, even if they haven’t changed. You must have direct loans to qualify

PAYE (Pay As Your Earn Repayment) Plan

Eligibility: To qualify for PAYE you must be a new borrower with federal direct loans.
Monthly Payment: 10% of your discretionary income
Repayment Period: 20 years
Pros: To qualify, your monthly payment must be less than what you’d pay under Standard Repayment Plan.
Cons: Best for spouses with two incomes, those with grad school debt, or those with low earning potential.

Delinquency

No matter what plan you choose, pay close attention to the amount due each month and pay it in full by the due date. Your loan is considered past due, or delinquent, one day after you miss a payment. If your account is delinquent for 90 days or more, the loan servicer reports that delinquency to the three major credit bureaus, impacting your credit score and making it difficult to secure other loans.

If you fail to make loan payments for around nine months, your loan could go into default. This carries serious consequences, like the entire balance coming due, loss of ability to choose a repayment plan, potential pay garnishment and tax refund withholdings, and even legal repercussions.

Deferment and Forbearance

If you’re in a tight spot and making your loan payments is a challenge, look into deferment or forbearance options. The details vary, but both options suspend your payments for a period of time.

Deferment temporarily postpones loan repayment under certain conditions, like if you’re undergoing treatment for cancer, experience a qualified economic hardship, enroll in a graduate fellowship program, or are on active military service.

Forbearance temporarily suspends or reduces loan payments. Your loan servicer can grant a general forbearance for things like financial difficulties and changes in employment. There are also situations that require mandatory forbearance, including National Guard Duty, and participation in a medical or dental residency.

Even if you qualify for these temporary assistance measures, in most cases interest on your loan will continue to accrue. And if you’re working on loan forgiveness, you won’t make progress toward forgiveness until you start repayments again. For that reason, it’s better to switch to a different repayment plan, if possible, when making payments becomes difficult.

Consolidation

Borrowers with multiple federal student loans may be able to save money (and time) by consolidating them into one fixed-rate loan. Consolidation is free, and can lower your monthly payment or make it possible to qualify for income-based repayment plans and loan forgiveness programs.

Consolidation can extend your repayment period, though, and you may pay more in interest. Also, you’ll lose any borrower benefits such as interest rate discounts, principal rebates, or some loan cancellation benefits on your existing loans when you combine them into a new loan. Keep in mind you can consolidate some of your loans while keeping others as-is.

If you have private loans, consolidation may also be an option, but it depends on your lender.

Get Info

Stay on top of federal student loan details by visiting https://studentaid.gov/h/manage-loans. Here you can find loan servicer details, estimate payments, start making payments, and more. If you have private loans, you’ll need to contact each lender individually for this information.

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Posted In: Credit