Many students are indebted to student loans. But if it were not for these loans, they might not be able to afford a degree. Student loans undoubtedly ease the financial burden on students by filling financial gaps and making it easier to acquire higher levels of education. The trade-off? To repay student loans can be a long-term hassle.
Let’s address the elephant in the room—many of us enter student loan programs without fully understanding their details, which is not a very smart move. Without a complete understanding of the various loan repayment options, you will be unable to make the most informed choice. You might even end up paying more than you should.
This article compiles all the necessary information that you need to know regarding student loan repayment; GetEducated helps you to make the most of your student loans.
Article Navigation: Understanding the Terms of Loan Repayment | Types of Student Loans | What will Exit Counseling Teach Me About my Loan? | Federal Student Loans—Repayment Options | Understanding Student Loan Forgiveness | Changing Your Student Loan Repayment Plan | Tips for Student Loan Repayments | Get Started with an Affordable Online Degree Today to Avoid Hefty Loans! | FAQs Guide to Repay Student Loans
Understanding the Terms of Loan Repayment
Before we get into the details of repayment structures, it’s essential to know the basic terms that you’ll encounter regarding loan discussions. These include:
- Interest
- Fees
- Borrower rewards
- Borrowing limits
We define and discuss each of these below as they relate to student loans.
Interest
You need to understand whether a loan acquires fixed or variable interest. Loans apply interest rates as a means for the lender to realize a profit from administering your loan. Interest rates can range from less than 1% to over 12%. So it pays to shop around before you sign for your student loan.
With fixed interest rates, which never change, it’s easier to calculate your finances beforehand because it uses a fixed amount over your loan.
Congress is responsible for setting these rates guaranteed by the government. But with variable interest rates, the story is a little different. The lender has the upper hand in this scenario and can set an amount that can potentially fluctuate every month. While your starting interest rate might seem attractive, be aware that you could end up with an interest rate much higher. This can occur when you select a plan with variable interest rates.
Fees
There are different kinds of fees attached to the loan process. Lenders deduct an origination fee at the start of the loan process. Furthermore, lenders charge a disbursement fee every time you receive a lump sum from your loan. Finally, late fees occur with late payments and defaulted loans.
Borrower Rewards
The borrower might also incur certain benefits, which can decrease costs for you at the time of repayments. The incentives can include interest rate reductions or cash-backs. These occur if you agree to go through the repayment process and adhere to particular demands such as one-time payments or enrolling in automatic debit programs, among other options.
Borrowing Limits
Certain limits exist on the amount of money you can borrow from the federal government. Several factors determine these limits, including:
- Your year in school
- Your field of study
As juniors or seniors, students receive higher borrowing limits, and so do people in the healthcare field (in the form of additional loans specific to their area only).
People enrolled in graduate school usually receive the highest amount of all because those graduating from these programs will have an improved ability to pay back their debts. Understanding these differences is essential. It gives you a clear idea of where you stand regarding your borrowing position. This helps you not to overestimate your financial situation.
Now that you have a slightly better idea of these terms let’s get into the repayment schemes.
Most student loans use the standard ten-year repayment plan to repay student loans in 120-fixed installments over ten years. The relatively short repayment period of ten years minimizes the amount of interest your loan accrues.
This plan offers the lowest interest rates. While the monthly payments are a bit higher than other plans, you will have paid off your loans in ten years and saved money on interest payments due to the structure of this plan.
Other repayment options remain available to students. Researching your choices will enable you to pick the best one that suits your circumstances.
Types of Student Loans
The Department of Education offers federal student loans, which usually have lower fixed interest rates than other loans.
Credit unions and banks offer private student loans with lesser perks but higher borrowing limits and benefits if you hold excellent credit.
What will Exit Counseling Teach Me About my Loan?
There is no need to panic if you do not have enough information about student loans. This is the situation that exit counseling tackles—as does this article. Once you finish school, you will take a short 30-minute online course to teach you all you need to know about the repayment of federal student loans. This course is known as exit counseling.
Those students with private loans do not have to take this course. Still, those on PLUS loans, direct subsidized or unsubsidized loans, or the Federal Family Education Loans (FFEL) do have a requirement to complete it.
Once the exit counseling process is complete, you have the option to pick a repayment plan. You will automatically start on the ten-year standard plan if you do not choose a plan. The good news—you can change your option anytime down the line. But that doesn’t mean you shouldn’t know which one is best for you beforehand. Take a look at the following list and decide the option best for you.
Federal Student Loans—Repayment Options
First, decide your priority. Do you wish to complete the repayment as fast as possible to get lower interest rates and minimize your total repayment amount? Or do you want to spread the payments over time which would lower your monthly payment. This ensures higher affordability, but you will pay more in interest.
Federal student loans come with two types of repayment plans (each with its own pros and cons):
- Traditional
- Income-driven
Let’s take a look at each individually.
Traditional Loans
– Ten-Year Standard Repayment Plan
This is the one we already talked about above—fixed payments over ten years—to minimize your payment period and interest rates. This plan suits those who will enjoy a higher income.
Another consideration occurs if your income drops. The repayment amount remains fixed. This means that you will pay a higher percentage of your income, which might affect your quality of living. Despite these problems, you will find this an excellent option if you want to repay your student loans as fast as possible.
– Extended Repayment Plan
This option is only available for people with more than $30,000 in outstanding payments on their federal loans. It offers no loan forgiveness, and you might incur higher interest rates. Still, the latter is only because it stretches the repayment period to 20 or 25 years (offering lower monthly payments).
Some might say it’s a gamble, but why not if you think you can make this option work for you? However, you should note that it would be slightly better to go for an income-driven plan as those offer forgiveness options after a specific period.
– Graduated Repayment Plan
This is another plan with a 10-year repayment period. Still, the benefit is that payments are initially lower and gradually increase over time. This way, new graduates do not face immediate burdens. They can slowly adjust to higher payments over time, hopefully as your income increases. This plan might work for those expecting an increase in income as your experience increases. Some college majors are more likely to lead to good-paying jobs than others.
However, other conditions remain similar to the traditional options mentioned—your payment pays off quickly. Still, there is no option for loan forgiveness.
Another thing to consider is the uncertainty you have about increasing your income. If it doesn’t occur, you will be stuck paying higher payments at a lower income level if it doesn’t happen. Also, your early years of paying less will accrue more interest in the long run, eventually requiring you to pay a little more than the standard 10-year option.
Income-Driven Repayment Options
There are four options to choose from in this category. Still, they all come with some fundamental underpinnings that remain the same.
The repayment period can be 20 or 25 years, with you paying a fixed percentage of your income every month. If any outstanding payment stands, it is forgiven at the end of your repayment period. Your family size also determines your monthly repayment amounts, along with your income.
Some months, people might also qualify for payments of $0 based on exceptional circumstances. These months do count towards the total repayment period. Graduates with high loans but lower incomes find this option an excellent one.
There is a small catch—the minor requirement of recertifying your income annually. You might lose this plan if you don’t follow through.
– Pay As You Earn (PAYE)
Over 20 years, borrowers pay 10% of their discretionary income monthly. Still, the amount will never exceed the amount you would pay on the standard plan.
Discretionary income = Annual Income – 150% of the poverty guideline based on your family size and state
In addition, this plan has borrower requirements, including that you must have received your first federal student loan either on or after the 1st of October 2007. You might have received an additional loan either on or after the 1st of October 2011. These dates limit the number of students eligible for this repayment plan.
On this plan, if your income decreases, your monthly payments will also drop to keep the entire process affordable for you. However, the problem arises that the more extended a repayment period you choose, the more interest you will accrue.
– Revised Pay As You Earn (REPAYE)
The repayment amount is still 10% of your monthly discretionary income. The repayment period is 20 years if all your loans are for undergraduate programs and 25 years if any loans are for graduate programs.
There are no monthly caps in REPAYE plans as there are in PAYE plans, and your monthly payments might become larger than the standard repayment plan. The good thing is that you still have access to loan forgiveness, and your monthly payment will drop in case of a decrease in income. You will still accrue higher interest, owing to the extended repayment period.
Moreover, there are no limiting requirements: any student with eligible federal loans can choose this option.
– Income-Based Repayment
With this plan, you need to understand a few things. If your first borrowing date were the 1st of July 2014 or after, you would pay off your loan over 20 years in installments of 10% of your discretionary income monthly.
It offers almost the same pros and cons as the previous two income-driven plans, with one slight addition. If your first borrowing occurred before the date mentioned above, you would make monthly payments over 25 years set at 15% of your discretionary income. If you are not a new borrower, you will be paying more monthly and over a longer period as per the mentioned date.
– Income-Contingent Repayment (ICR)
This plan is a little more expensive for borrowers than the others. Your monthly amount depends on either of two parameters: the amount you’d pay on a fixed repayment plan of 12 years or 20% of your discretionary income. Whichever one of the two is the lower, that is the one you pay. The repayment period is technically 25 years.
Students should be aware that this plan also changes in the calculation of discretionary income.
Discretionary income = Actual Income – 100% of the poverty guideline based on your family size and state.
The ICR is a good option for those looking for more extended repayment periods and lower monthly repayments. But you might still be looking at a higher monthly payment than the standard plan. Moreover, it is the only option that parent PLUS loan borrowers can utilize, but only after their PLUS loans are consolidated into direct loans.
– Income-Sensitive Repayment
This is the only option for those repaying FFEL loans, and only they can qualify for this plan. Your lender determines your monthly payments, and the repayment period is ten years which decreases your total interest payments. Your monthly payments must also exceed 20% of your income to qualify for this plan, making it a lesser-taken option.
Which One of These Options Should You Pick?
Now that you have an idea of the options available to you, it is time to select how you will repay your student loans. There is no genuinely ideal repayment plan. With each one, you sign up with specific challenges that affect your financial conditions. However, you can consider certain factors to make sure that you pick the right plan for yourself.
Consider your income levels and the size of your family, along with any other personal circumstances that affect your financial standing. Moreover, consider whether you wish to seek forgiveness on these loans. See below for more information on loan forgiveness.
Understanding Student Loan Forgiveness
Right off the bat, any non-federal loans will not qualify for forgiveness. Only direct federal loans are eligible. Other federal loans might become eligible if consolidated into a single direct consolidation loan.
Direct loans replaced the Stafford loans in 2010, but they are also eligible for this process. Since 2020, some burdensome regulations now affect loan forgiveness.
There are various forgiveness options, such as forgiveness on income-driven plans, teacher loan forgiveness programs, and Public Service Loan Forgiveness (PSLF).
Student loan forgiveness is also not the same as forbearance. The latter is a postponement of the loans rather than a complete elimination. The forbearance process also works differently from forgiveness, with different eligibility criteria and other conditions.
Changing Your Student Loan Repayment Plan
If the repayment play you initially chose isn’t working for you, you can change how you repay your student loans. Before making the shift, make sure you know the circumstances that will change with your new plan. The Federal Student Aid Loan Simulator tool allows you to compare your total costs in each program to ensure that you do not choose a worse option.
Your loan servicer will help you change your plan, which sometimes requires submitting an application or additional paperwork. The whole switch might also take a little time to occur, so make sure not to neglect your payments through your usual plan in the meantime.
Tips for Student Loan Repayments
Here are some tips that will help you stay on top of repaying your student loans:
- Organize yourself. Keep all necessary paperwork together and place reminders for r payment due dates. Instead of making the payment on the last possible date, making it a little earlier is always better.
- Do not lose track of your payments. If you start missing out on payments, it will affect you adversely in the long run, and you might even acquire additional late fees on your payments. Stay on top and ensure that you make the actual payments before the due date.
- Setting up automatic monthly payments through your checking accounts can help. This ensures timely payments and provides you with certain deductions in interest rates. With federal loans, you can get a 0.25% reduction in your interest rate through automatic payments.
- Budget adequately and stick to it. Use budget calculators and self-control to keep yourself in check. Going overboard on your budget might cause you to miss monthly payments.
- The federal government offers student loan interest deductions based on your taxes. It is up to you to take advantage of them.
- Lastly, make sure you’re picking the right plan. Consider interest rates and repayment periods, and be prepared for what you’re setting yourself up for. But also, don’t pressure yourself too much; if the payment plan doesn’t work out for you, you can always switch.
Get Started with an Affordable Online Degree Today to Avoid Hefty Loans!
The earlier you know how you want to repay your student loans, the earlier you can plan your finances. You might start earning through part-time jobs while you’re still in college, which will give you a headstart and a safety net when the repayment period begins.
All of these things can happen only when you prepare. The idea is not to overwhelm students while they’re still at the start of their college programs but to make them aware of what’s coming. The more informed you are, the easier it is to keep yourself composed and act smartly when the real work starts.
Lastly, there is a lot to discuss regarding student loan repayments. There are many options to assess, many factors to consider, and an array of circumstances to examine before you pick a plan. Make sure you’re doing all the necessary research and are making an informed choice.
FAQs Guide to Repay Student Loans
What is the best way to pay a student loan?
There are several ways to make the most of your student loan repayment. These include:
- Make a budget and stick to it
- Start early and work part-time during college
- Try applying for loan forgiveness
- Avail yourself of discounts that can lower your interest rate
- Establish a college repayment fund
Can your student loans be forgiven after 25 years?
Most repayment plans forgive any outstanding balance on your student loan after 20-25 years of inability to pay. However, you might have to pay income tax on the due balance you had forgiven.
Do student loans go away after seven years?
No, student loans don’t go away after seven years, and the period for forgiveness is usually 20-25 years. If yours has disappeared, your student loans probably defaulted. It is best to correct this as soon as possible.