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Repaying Student Loans

Repaying Your Loan
April 16, 2018

In 2017, more than 44 million American students left school with student loan debt.4 If you're one of these people, it's important to get your loans paid off as soon as you can. In most cases, the longer you take to pay back your loans, the more interest you'll accrue.

Both private and federal loans are available to help students pay for school. There are two types of federal loans: subsidized and unsubsidized1. Subsidized loans are considered better for students because the U.S. Department of Education pays the interest on the loan while the student is still in school. That is the key difference between subsidized and unsubsidized loans; the student is responsible for all interest on unsubsidized loans.

Let's look at ways to pay off student loans.

Payment Plans

Some examples of common payment plans2 you can choose are:

  • Standard 10-year plan.
  • Graduated 10-year plan.
  • Income-Based plan.

In a standard 10-year plan, your payments stay the same, no matter how far into the plan you are. You won't pay as much interest on this plan and it is overall cheaper. However, your fixed payments could be fairly high. This means you could run into problems making the payments early in your career.

In a graduated 10-year plan, your payments start low, but increase over time. Although this may sound like a bad idea, it can help if your starting pay is relatively low. Since your income may increase as you get older and gain experience, it can be a great option. After all, your payments will scale to best suit how much you're being paid, in theory. However, interest will build up on a graduated plan even more than a standard one. Because of this, you could end up paying more in interest.

There are three common types of Income-Based plans:4

  • Income-Based Repayment (IBR) – Your payments are a portion of your monthly income. This portion is usually 10% to 15% of your disposable income.
  • Pay as You Earn – Similar to IBR but your payments cannot be more than 10% of your disposable income. Additionally, you can only qualify if you were a new borrower after October 1, 2007.
  • Revised Pay as You Earn – The newest payment option. It's almost the same as Pay as You Earn but it includes people who didn't meet the October 1, 2007 requirement.
  • Income-Contingent Repayment (ICR) – This plan lasts 12 years and monthly payments are 20% of your disposable income.

All three plans differ by the percentage taken out of your monthly pay3

Consolidating Loans

Another option to consider is consolidating your student loans. This means a lender of your choice pays off your loans and replaces it with one single loan with new terms. Like other plans, you can get a federal or private consolidation loan.

On the upside, repayments are simpler, debt is easier to track, and it gives you lower payments. Not to mention, you'll only be paying interest on one loan instead of several.

However, there are a few cons as well. For instance, you now have a longer repayment period which means you'll be paying more interest. If you change your 10-year plan to a 25-year plan, your total interest paid could go from $11,000 to $18,000. Since you'll be getting new terms, you may miss out on some of the benefits the original terms offered.

Delaying Loans

If you're having a hard time paying your loans, you might want to think about delaying them. There are two ways you can do this: deferment or forbearance.

The word "deferment" makes it sound more complex than it is. It simply means putting something off. When you defer your loan, you're putting off payments until a later time when you can afford to. Deferment can last 0-3 years. You may be able to defer if:

  • You're going back to school.
  • You're in the military.
  • You're unemployed.
  • Your income is under the minimum wage.
  • You're in financial trouble.

There are a few things to consider before getting a deferment. While you're in deferment, interest won't build up over time on your subsidized loans. The government pays it for you. But on unsubsidized loans, it will build. In addition, this interest is added to the total amount of the loan, which means it will start to build on top of the amount each time. Because of this, your interest could quickly get out of hand if you're re-paying an unsubsidized loan. Thankfully, you can choose to pay off your interest during deferment.

Forbearance, on the other hand, means holding back. It's similar in idea to deferment but the interest will always continue to grow. This interest will be added to the total amount if you don't pay it in advance. Forbearance can end up costing more than deferment. It might be a good choice if you're having trouble paying but don't qualify for deferment. Also, it can't last longer than 12-months. You may be able to forbear if:

  • You have medical expenses.
  • You're in financial trouble.
  • There was a change in your job situation.

There are two types of forbearance: discretionary and mandatory. For the first type, your lender decides to grant it, but for the second type, if you meet eligibility, they are required to grant it.

Read more about delaying loans at http://studentaid.ed.gov.

Loan Forgiveness

It's possible to not have to pay at all. If you qualify for loan forgiveness, it will get rid of your loans and you won't have to repay them. That's right – they'll be gone.

Loan forgiveness is a broad topic that could easily fill up an entire article. It appears in many different forms. For example, some public service jobs offer loan forgiveness programs to employees. These are usually jobs that "give back" to the community in some way. A good example is the Teacher Loan Forgiveness Program, which is offered to people who teach at a low-income school for five years in a row.

To explore loan forgiveness programs, check out this article from Federal Student Aid.

Tips and Warnings

Don't just forget about your loans and stop repaying them. This can hurt you financially and end up causing you a lot of trouble. For example, your credit score could take a huge hit. Or, even worse, your loans could go into default. This means the balance can become immediately due, and the government may take money from your employer to pay it off. Going into default has an even worse effect on your credit score. Always try to be responsible with your loans as well as money in general.

 

Sources

1https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized

2https://studentaid.ed.gov/sa/repay-loans/understand/plans

3https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017

4https://www.fool.com/investing/2018/03/22/your-2018-guide-to-federal-student-loan-repayment.aspx

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