What is the best way to pay?


Student loan borrowers have a variety of options when it comes time to start repaying their loans. Federal student loans offer the most flexibility, while private student loan options are more limited. The best way to pay will depend on the type of loans you have, how much you owe, and your financial situation after graduation. This guide explores your current options.

Key takeaways

  • Both federal and private student loans offer several repayment options, and federal loans provide the most flexibility.
  • Some payment plans allow you to make smaller payments over a longer period of time, although that may mean paying more interest in total.
  • Several federal plans base your payments on your income.

Federal Student Loan Repayment Options

There are several repayment plans that you may be eligible for if you have federal student loans. This is how they compare. One note: so far, the public service loan forgiveness program has turned down the majority of applicants, so keep in mind that choosing a payment plan that is a good fit for the program does not guarantee loan forgiveness. your loans.

1. Standard payment plan

  • Who is eligible: All borrowers.
  • How does it work: Payments are fixed and loans are paid off over a 10-year period.
  • Who is it good for: Borrowers who want to repay their loans in the shortest time possible to minimize interest charges.
  • Who is not good for: Borrowers interested in public service loan forgiveness.

2. Gradual payment plan

  • Who is eligible: All borrowers.
  • How does it work: Payments start out lower, then gradually increase, with loans paid off in full over a 10-year period.
  • Who is it good for: Borrowers who expect their income to increase over time and want to pay off their loans as soon as possible.
  • Who is not good for: Borrowers interested in public service loan forgiveness.

3. Extended payment plan

  • Who is eligible: All borrowers, although federal Borrowers of direct loans and Federal Family Education Loans (FFELs) owe more than $ 30,000.
  • How does it work: Payments can be fixed or gradual, with loans paid in full over a period of up to 25 years.
  • Who is it good for: Borrowers who have larger loan balances and need a lower monthly payment.
  • Who is not good for: Borrowers who are interested in public service loan forgiveness or who want to pay as little interest as possible on their loans.

4. Payment plan based on your income (PAYE)

  • Who is eligible: Borrowers who received a Direct Loan disbursement as of October 1, 2011.
  • How does it work: PAYE takes monthly payments at 10% of Discretionary Income, but it never exceeds what you would pay in a Standard Payment Plan.
  • Who is it good for: People who need a low monthly payment and / or are interested in public service loan forgiveness.
  • Who is not good for: Borrowers whose income fluctuates significantly from year to year.

5. Revised Pay As You Earn Payment Plan (REPAYE)

  • Who is eligible: Any Direct Loan Program loan borrower with an eligible loan. PLUS loans for parents, for example, are not eligible.
  • How does it work: Your monthly payments are set at 10% of your discretionary income.
  • Who is it good for: Direct Loan Program loan borrowers who need a low monthly payment and don’t mind paying potentially more interest over the life of the loan compared to a standard repayment plan. Also those interested in Forgiveness of Loans for Public Service.
  • Who is not good for: Married couples who file jointly and have a higher combined income.

6. Income-based payment plan (IBR)

  • Who is eligible: Borrowers with subsidized and unsubsidized direct loans, subsidized and unsubsidized federal Stafford loans, student PLUS loans, and consolidation loans, but not PLUS loans made to parents. Borrowers must also have high debt relative to their income.
  • How does it work: Monthly payments are 10% or 15% of discretionary income, depending on when you applied for the loan, but never more than you would pay with a standard 10-year repayment plan. After 20 or 25 years of payments, you will be eligible for public service loan forgiveness.
  • Who is it good for: People who have a high debt balance and need smaller monthly payments due to lower income, as well as anyone interested in public service loan forgiveness.
  • Who is not good for: Borrowers who can afford to put more than 10% or 15% of their income toward paying each month and pay off their loan faster.

7. Income contingent payment plan (ICR)

  • Who is eligible: Any Direct Loan Program Loan borrower with an eligible loan. PLUS loans for parents, for example, are not eligible.
  • How does it work: Monthly payments are 20% of discretionary income or the amount you would pay over 12 years with a fixed payment based on your income, whichever is less.
  • Who is it good for: Borrowers who can afford to spend more of their monthly income on the loan, but not the amount required by a standard repayment plan. Also those interested in Forgiveness of Loans for Public Service.
  • Who is not good for: Borrowers who owe anything other than Direct Loan Program loans or married couples who file jointly and are in a higher tax bracket.

8. Income sensitive payment plan

  • Who is eligible: Borrowers of Federal Family Education Loans.
  • How does it work: Monthly payments are based on annual income, and loans are paid in full over 15 years.
  • Who is it good for: FFEL borrowers who want a lower monthly payment than what they would get with a standard or graduated payment plan.
  • Who is not good for: Borrowers interested in public service loan forgiveness.

The Department of Education suspended interest and monthly payments on federal government student loans until September 30, 2021. The American Rescue Plan approved by Congress and signed by President Biden in March 2021 also includes a provision that the forgiveness of student loans issued between January 1, 2021 and December 31, 2025 will not be subject to tax for the recipient.

Which Federal Student Loan Repayment Option Is The Best?

The answer to this question may be different for each borrower. “Paying down student loans isn’t one-size-fits-all, but most people just try to pay off their debt normally,” says Shann Grewal, vice president of IonTuition. “When borrowers are not looking for a payment plan that best suits their situation, it has a huge impact.”

Your choice of plan can affect other financial decisions you make. If you commit, for example, to a standard 10-year repayment plan based on the salary you earn in your first job after college, that could influence your future career path if you decide to stay until the loans are paid off. Your loans may be reduced to zero, but in the meantime, you could miss out on opportunities to increase your salary or advance your career.

It’s also important to keep income-based payment plans and their usefulness in perspective. Choosing an income-based payment plan can depend on a number of factors, including what you are earning now and your future earning potential.

“Some students will immediately enter the workforce with a high-paying job, while others will be asked to move up,” says Lena Chukhno, general manager of student loan refinancing at Earnest. Other variables that come into play include the amount of debt and whether you plan to go back to school to earn a graduate degree at some point.

Chukhno says it’s important to keep long-term goals in mind when choosing a student loan repayment plan. “You can always refinance your loan in the future if the situation changes, but it’s best to start on the right note so you don’t get into financial trouble.”

Eligibility for the PAYE, REPAYE, IBR and ICR payment plans is not guaranteed from year to year. Your eligibility and payment amounts are recalculated annually, based on your household income and family size.

Private student loan repayment options

Private student loans often offer fewer options to borrowers. These include:

  • Immediate refund: Principal and interest payments begin as soon as your loan is disbursed.
  • Interest-only payments: You make interest payments only while you’re in school, then start paying principal and interest once you graduate or fall below half-time enrollment.
  • Fixed payments: You pay a low flat amount while in school, then start making larger regular payments once you leave school or drop below enrollment status at part-time.
  • Total postponement: You pay nothing while you are enrolled in school and you begin to pay interest and principal within a set period of time after leaving school.

Depending on your lender, you may be eligible for a deferment or forbearance period if you cannot keep up with your regular loan payments. But this usually requires a financial hardship and not all lenders offer it.

If you have private student loans, it’s important to do the math to see how much interest the various payment options will cost you over the life of the loan. You might also consider refinancing your private loans if it allows you to get a lower interest rate. This can save you money on interest over the repayment term. Refinancing a student loan usually involves a credit check, so if you don’t have a strong credit history yet, you may need a co-signer to qualify. Finally, if you are having difficulty managing your monthly payments, contact your lender as soon as you can and see what can be resolved.

The bottom line

If you have an education debt, take the time to learn about your payment options. Ideally, this is something you should do before graduation so that you have an idea of ​​the payment plan you want to start with. If you choose a plan based on income, reevaluate your finances every year to see if another payment option might be better to save you money on interest charges.

www.investopedia.com

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