The student loan debt trap is a huge problem in the US. According to a study, around $1.5 trillion people have a debt of student loan in the US. You can clearly imagine the stress that comes from such a huge debt.
The student loan comes from 2 sources majorly, that is from the Federal Government and Private Lenders.
Both of these providers have totally different terms and conditions along with the interest rates and repayment options. You can go for federal loans rather than the private ones if you don't need to borrow a very huge amount. They offer more affordable lower interest rate and flexible terms.
Federal student loans come with various student loan repayment options, and based on the requirement and need, you can choose one. If you require a lower monthly payment option then you can go for Income-driven repayment plans.
If you want to move out of debt before your timeline, it can be achieved with extra payment but, we can't disagree that student loans are stressful.
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Federal student loan repayment plans
The first and foremost important thing when it comes to student loan repayment is choosing the right plan which helps you in the process.
There are totally 8 different plans to choose from for federal student loans. We have grouped the 5 IDR based plan to make it a little easy.
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1 - Standard Repayment
This plan offers you a certain option which will make equivalent and fixed monthly payments for every year for a period of 10 years.
2 - Graduated Repayment
This provides the option which allows you to start with a lower payment option which can steadily go up till you pay it off the loan totally. The lower initial payments which were made easier for meeting your monthly income whereas you are in the job.
As your salary increases and you go up in your job, the monthly payment will also go up. This also gives you 10 years time period for repayment.
3 - Extended repayment
This provides you with a lower monthly repayment option in which the term can be extended for a duration of 25 years. You can choose the fixed payment option, where the payment remains the same for every month and will increase over the timeline.
4 - Income-driven repayment plans
In this option, your monthly payments are calculated based on the percentage of your monthly income. In which you are most likely to earn a lower and the monthly payments are smaller. The income is reviewed on a routine so when it is increased the monthly payments also becomes larger.
Where this makes sure that you meet your monthly expenses. IDR plan generally caps down your monthly payments from 10 to 20% based on the discretionary income.
[Also Read: What are income-driven repayment plans ]
a) Income-Based Repayment (IBR)
The IBR is under the IDR plan and it is offered by the Department of Education. IBR can help pay student loans for people who can't afford their monthly federal student loan payments under the standard repayment option.
It is based on the Income-driven student loan repayment option.
b) Income-Contingent Repayment (ICR)
There are several options available under the income-driven options for people who struggle to make standard payments. It's important to make you understand what is it that can extend your timeline for a period of 25 years. After that particular period, the remaining payment will be forgiven.
The forgiven amount is considered taxable income. Your monthly payment will be based on 20% of your discretionary income.
c) Pay As You Earn (PAYE)
This type of loan option provides you an option in which the amount is based on your income. Federal student loan borrowers who struggle to make a payment can opt for the PAYE. To qualify for it you, need 10% of your income and it will be forgiven after a period of 20 years if the payment is not missed in the timeline.
d) Revised Pay As You Earn (REPAYE)
This program is designed to cap down your monthly payments from your income. It can help you in making more manageable funds if you are unable to pay the loan under the standard repayment plans.
This program not only reduces the monthly payment but also makes forgiveness of student debt if you are qualified for the same.
e) Income-Sensitive Repayment (ISR)
If your loans payments are getting out of the hands then you can look into the option of caping down your payments from 4% to 25% of your total monthly income. The difference in the income-sensitive repayment plan is that you choose your monthly payment until you pay more or equal to the accrued interest amount every month, you have the option to choose accordingly. This lasts for a period of 5 years and you don't want to extend it.
Most of the income-driven plans at the end will provide you forgiveness after being paid off for a period of 20 - 25 years. For some people, the standard repayment might be difficult and for others, it might be worse as they may not be earning enough to pay off the debt.
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Private student loans holders don't have these feature of the flexibility of student loan repayment and qualification for IDR plans. Every lender has his own set of requirement where most choose between 5 and 20 years to pay off.
If you are struggling and are not being able to keep up with the loans, you can always talk about that with the lenders or service providers, whether you can choose a new term or go for forbearance to postpone your payments for a certain period of time.
Refinancing is also another good option. To determine the student loan repayment options from the private lenders, call them and discuss what's new and what can benefit you.
Four basic of repayment plans for Private student loans
When considering with the Private lenders each has a different one and may vary accordingly.
1 - Immediate repayment
It starts as soon as you take out the loans. Some students prefer to look into the options where they can get down with their loans even when they are enrolled in the college. This will save money and interest.
2 - Interest-only repayment
This allows you to pay only the interest that has accrued when you are in school or college and the other remaining loan amount is required to be paid after the completion of graduation.
3 - Partial interest repayment
This plan allows you to pay lower monthly payments when you are in school. You can pay partial interest while in school and the payment amount increases over the time period and you required to pay more.
4 - Full deferment
You don't need to pay the loan amount until you graduate and become employed through deferment. You need to keep in mind that interest starts to accrue as soon as you get it.
Determine how much can you pay for each month
Learn about all the different types of student loan repayment plans Look closely into the budget to get a better understanding. Calculate the amount to get accurate information on the spending.
With the idea of income and expense, try to go on how much you can afford to pay towards the student loan every month.
Things to consider before choosing a repayment plan
If your student loan debt dues are difficult on you and it's hard for you to make payments under the standard repayment plans, consider for other plans available out there. You can qualify for the loan based on the income you earn and the loan type you have chosen.
Does my income rise over time?
If yes, you can go for the Graduated Repayment plan. The options regarding your payments will begin at a lower rate and get high as you go further in this plan.
Do I need a long term relief?
If you are looking for it then you can go for extending your repayment plan or any IDR plans whichever has a longer repayment term. You can go for an Extended Repayment plan as they offer 20 - 25 years.
What am I working towards?
If you are going towards the Public Service Loan Forgiveness (PSLF) program, then you have some repayment options such as IBR, PAYE or REPAYE which will help you with it.
Choosing the right plan will help you work towards the monthly payments without disrupting. Point to consider is that In the long run with the lower monthly payments will cost you more as interest.
If you have a private student loan and are looking for the relief, you need to talk with your loan servicer. It can offer you a temporary forbearance in case of economic hardship.
Pay more to get out of sooner
Further down the lane carefully looking at your budget and you see that couple of bucks are still where it can be used to pay more on the monthly payments where it will get you faster out of the debt. This can be done without any penalty.
The Department of Education and most private lenders can't penalize you for paying the loan sooner. You can set up a recurring or a one-time payment where all the extra payments to pay off the debt.
Repayment period for Private student loans
The repayment period for private student loans where it usually takes around 7 - 15 years. Some lenders offer you an Extended Repayment period for up to 30 years based on the amount of your debt. The loan is fixed with the interest rate where it has shorter repayment periods on the loans with an interest rate.
The options for repaying the private student loan are created by the lenders itself and It's also important to keep in mind the repayment process before getting a loan.
Look for the interest rate - The standard repayment term on a federal student loan is 10 years and some private lenders provide shorter and longer repayment terms ranging from 5 to 20.
Repayment benefits and drawbacks
Start making the principal and interest payments as soon as the loan is disbursed fully.
The money on the interest will be saved and paid faster.
You might get the lower interest rate on the loan once you agree to pay while you are in the school.
Interest on the payments will accrue only while you are in school. You will make principals and interest payments after leaving school or leaving after half time.
You might get the lower interest rate on the loan once you agree to pay while you are in the school.
Paying from the school will be of smaller portions than the principal and interest rate.
The lower monthly payments are at $25 per month while in school. Make regular payment after once you leave school.
The monthly payments are affordable and comparatively lesser than full interest payments.
Sometimes the interest is added to the loan once you have started making payments.
There is no payment while you are in college. You start paying after 6 months from the time you left school.
No need to worry on the payments while you are in school.
Interest will accrue on the deferment period and it will be added to your loan after you make the payments
Other programs for Private student repayment
IF you are having some issues on making your repayment dues then the lender may suggest you some programs which can help you better. Contact your lender to get better knowledge on that.
This is provided by many lenders where it will reduce the payment or hold your payment for a particular period of time which is for a short time. if you are going through financial problems. Some forbearance gives the borrower time to make the interest only for a period of 1-2 years.
Discharge on Death and Disability
Lenders provide discharge on the private student loan only on certain events whereby the borrowers become totally disabled. Others forgive the balance on the event of borrower's death.
Best Tips for Student Loan Repayment
Go for Federal student loan
If you are really in need of the money and always go for the federal student loans as its less expensive, easier to manage and eligibility is done easily and it has other perks like repayment options.
Student loan forgiveness
If you get to qualify for Federal Public Service Loan Forgiveness program (PSLF) which will get your loan canceled after you make a qualifying 120 payments while you are stationed as a full-time public service job
Look for other benefits.
Before you get into the loan and debts try to do research and focus on the non-loan funds available like scholarships and tax benefits on the education, Which will also get you to help in the tuition installment plans where it might be the reasonable alternative to the long term debts
Employee reimbursement programs
Where some employers offer assistance on the tuition or student loan repayment where both are meaningful to the employee. Around 4% of employees have a student loan repayment assistance from their company benefits. Point to keep is that student loan reimbursement is considered taxable income.
Avoid excess loan amount
If your family goes for applying education loan, where members are treated to the annual and total limit of the student loan as a target. The great way to overcome the unmanageable student loan debt is to only get the money what they need and never take more than the required. The money you have taken needs to be repaid back and however, it's going to cost you more. So, be aware of the amount that you are looking to borrow.
Pay excess amount
Pay extra of $20 amount of every month on the student loan where it will save you around $906 in total interest paid is your loan is at $20,000 with 6.8% interest rate for a period of 10 years. An extra of $50 will put you at an$1,916 in saving for the total interest rate. All the small portions can be put together to have a huge impact on the interest rate
There are a lot of lenders who provide your interest rate at a reduction level between 0.25% to 0.50% once you get into the auto-debit option. The monthly payment is automatically debited from your account. Where this will save around 300$ as interest for an every $10,000 with a 10-year repayment term and $200 in term of 20 years repayment term.
Pay when you are in school
Great way to reduce the student loan is to pay the interest on an unsubsidized loan from the school and grace period to avoid the loan growth. Student loan allows the borrower to deferment the payment while they are in school. Where the undergraduate has subsidized loan where the government takes care of it. For graduate students, their interest accrued on the federal student loan is your responsibility and the same for the case of private student loans. By paying them in advance you can avoid the interest getting increased the loan from 15% to 20% from the starting time.
Make use of the advantages from the student loan interest deduction where you can get up to $2,500 in federal and private student loan. The interest that to be deducted as said in the above which exclusion on the federal income tax return. Where it can be claimed even when the taxpayer does not list.
If you are facing problems with your repaying of student loan it's better to notify the lender as soon as possible. Where they might give you a temporary deferment or forbearance based on the qualification.
You discuss the income-driven repayment options and leverage the forbearance or deferment without getting any damage to the credit score.
Federal and Private Student loan repayment options and tips FAQ
1. What are the repayment options for student loans?
Well, there are multiple numbers of federal loan repayment options available. By going through the best one for yourself will be more of the standard repayment or the income-driven repayment option, where depending on the goal of yours it will be determined.
2. What is my discretionary income?
The monthly payments which are under the income-based repayment(IBR) and Pay As You Earn (PAYE) and REvised Pay As You Earn are being calculated as 10% or 15% of the discretionary income. Where your income with a deduction of 150% of the poverty level for the family size and state.
3. Can I change student loan repayment plans?
Either you can assign or select a repayment plan where your first start towards the repaying of the student loan can help you with the changing of repayment plans at any time for free. Get in contact with your loan servicer if you are planning to discuss regarding the repayment plan options and for changing of plans.
4. What is the best income-based repayment plan?
The better plan will be from these 2 options those are Revised Pay As You Earn (REPAYE) or Income-Based Repayment (IBR). As these will set your monthly payments at 10% of your discretionary income, which is open to all direct loan borrowers, indifferent of whether you have a hardship of finance.
5. Is there any loan forgiveness for private student loans?
In general private student loans doesn't provide any offer the same benefits such as federal student loan which might be of forgiveness. Under certain circumstances, there are some options for private student loan forgiveness. Where it's totally based on the unique circumstances within the private lenders.
6. Do I qualify for IBR for student loans?
You can get eligible for the plans directly and some other need to consolidate their federal student loans in order to get eligible for IDR. If your income of 10% is more than the monthly payment that you pay in the standard repayment plan then you might not serve from the IBR Plan.
7. How do I apply for income-based repayment for student loans?
The process for applying the repayment plan in the federal student loan is simple. Just head to the studentloan.gov website or get a paper application from the loan servicer of yours. Select the necessary and suitable option which your servicer puts on the list along with the lower monthly payment available and never forget to recertify it every year.
8. How does income-based repayment plan work?
The Income-Based Repayment (IBR) is the most common and generally available income-driven repayment (IDR) plan for the federal student loans since the year 2009. The income-driven repayment plans can be helpful for the borrower to keep the loans payments at an affordable rate with the payment caps based on their income and family size of his.
9. Does income-driven repayment affect credit score?
While looking into it the following matters are also taken into consideration such as debt to income ratio (DTI) the credit score type of mortgage that you have applied. How much can you get from saving down the payments? Leaving the other things the only major thing that can be affected is the debt to income ratio which can help you with the score.
10. What is the income limit for income-based student loan repayment?
The monthly fixed repayment for the particular amount of the standard repayment plan is around $406 per month. The single borrower on an income-based repayment plan should earn around or at least $20,000 per year in order to make the loan repayment.