If you’re like most graduates these days, chances are you have student loan debt.
Simply put, student loans suck.
They often cause unrelenting anxiety and stress and force young adults to put off life’s milestones – such as saving for retirement (or at all), buying a house, and getting married.
There are many different repayment plans for student loans – especially federal student loans. With all of these options, it can be hard to tell which is best for you. In this article, I will quickly talk about some of the different options and who each is best for.
1. Standard 10-Year Repayment Plan
This is the plan everyone is automatically assigned once they receive federal student loans. Total repayment term is…you guessed it…10 years.
- Medium repayment length – borrowers don’t end up paying as much in interest as compared to other plans.
- Keep federal benefits such as deferment/forbearance and access to other federal plans
- Not the fastest repayment plan – others can save more money if they have shorter repayment terms
- May be stuck with servicer you don’t like
2. Income-Driven Repayment Plans
These are a group of federal student loan repayment plans (such as Income-Based, Income-Contingent, Pay As You Earn, Revised Pay As You Earn) that based student loan payments on the borrower’s salary. Payments are limited to 10% – 20% of borrowers’ monthly discretionary income.
- Payments can be as low as $0 (if you have no or very small income) – great option for those who have little to no income and need time to get back on their feet
- Government may pay accrued interest if your required payment does cover it
- Forgiveness after 20 – 25 years depending on plan
- Keep federal protections
- Lower payments = longer repayment term = more interest accrual = more expensive loan
- Will be taxed on forgiven loans, if applicable
3. Extended Repayment Plan
The extended repayment plan allows borrowers to stretch repayment plans out to up to 25 years.
- Longer repayment terms = lower, more manageable monthly payment
- Will have same payment over time no matter what your income is
- Do not lose federal protections
- Longer repayment term = more interest accrual over time = more expensive loan
- Will be paying loans back for longer time
4. Federal Student Loan Consolidation
Federal student loan consolidation is a process in which you can combine multiple federal student loans into one, more manageable federal student loan.
- More manageable as you only have to make one monthly payment
- Can change term length to fit your needs – for example, you can extend it to get lower monthly payments
- Do not lose federal protections
- Will not save money as with private refinancing and consolidation (see below)
- New interest rate is a weighted average of other loans, rounded up to nearest eighth
5. Private Student Loan Refinancing & Consolidation
This is an option for borrowers with both federal and/or private student loans. In short, you can refinance your student loan to a new term length or interest rate with a private lender or bank. Typically, you receive a lower interest rate or monthly payment. Eligibility is based on creditworthiness and income.
- Can save thousands over the life of your loan with reduced interest rate (this is the real reason people refinance)
- Can consolidate multiple student loans (private and federal) into one, more manageable loan
- Can choose new repayment length to fit your lifestyle
- Can change to new servicer if you don’t like previous
- Lose federal protections as your loans turn into private student loans. These include deferment and forbearance protections, access to income-driven repayment plans, etc.
- Hard to qualify for – must have strong credit score and income
- Will receive new servicer that you might not like as much