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Paying Student Loans: How to Pay Back Your Student Loans

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Paying off student loans is a top financial priority for many people, but it can be confusing and hard to navigate. Many people don’t understand how student loan debt works or what their options are to reduce their payments. Read this article to learn more about student loans and what options you have to pay them back.

Young male student reading a book in a library.

If you’re under 35 years old, chances are that you or someone you know has student loan debt. It’s been reported that the total student loan debt in America is over $1.5 trillion and the average student loan balance is over $30,000!

Studentaid.gov is a great, comprehensive resource to learn about the details of student loans and your repayment options. However, the vast amount of information available can be a bit overwhelming to process. Luckily for you, our experts have sorted through mountains of information to cover some of the most frequently asked questions on student loan repayment and other important details that you might have missed!

What kind of student loans do I have?

The first step to paying off your student debt is knowing what you’re working with. You may have different payment options and strategies available to you depending on the type of loan you have.

For most situations, we can break down student loans into two main categories: federal or private loans.

Federal student loans are government-funded and have certain terms and regulations that must be followed. Private student loans are loans that come from credit unions, banks, schools, or other private institutions. These types of loans will have different terms and payment options depending on the lending institution.  

The main differences between the two regarding paying back your loans include the kind of payment plans, loan forgiveness options, interest rates, when payments must begin and consolidation and refinancing options.

Below you can find a summary of the differences.

Subject

Federal Student Loans

Private Student Loans*

When payments become due

Payments aren’t due until after you graduate, leave school, or change your enrollment status to less than half-time.

Many private student loans require payments while you are still in school, but some do allow you to defer (put off) payments while in school.

Interest rates

The interest rate is fixed and is often lower than private loans—and much lower than some credit card interest rates.

Private student loans can have variable or fixed interest rates, which may be higher or lower than the rates on federal loans depending on your circumstances.

Subsidies

If you have financial need, you may qualify for a loan for which the government pays the interest while you’re in school on at least a half-time basis and during certain other periods. This type of loan is called a "subsidized loan."

Private student loans are often not subsidized. In the case of an unsubsidized loan, you will be responsible for all the interest on your loan.

Credit check

You don’t need to get a credit check to qualify for federal student loans (except for PLUS loans). For PLUS loans, your credit will be checked before determining whether you are eligible. 

Private student loans often require an established credit record or a cosigner.

Tax benefits

Interest may be tax deductible.

Interest may be tax deductible.

Consolidation and refinancing

Loans can be consolidated into a Direct Consolidation Loan. 

Private student loans cannot be consolidated into a Direct Consolidation Loan but may be refinanced.

Postponement options

If you are having trouble repaying your loan, you may be able to temporarily postpone or lower your payments.

You should check with your lender to find out about options for postponing or lowering your loan payments.

Repayment plans

There are several repayment plans, including an option to tie your monthly payment to your income.

You should check with your lender to find out about your repayment options.

Prepayment penalties

There is no prepayment penalty fee.

You need to make sure there are no prepayment penalty fees.

Loan forgiveness

You may be eligible to have some portion of your loans forgiven if you work in public service. 

Although many private lenders do not offer loan forgiveness programs, some student loans from state agencies can be forgiven in certain circumstances.

*Private loans differ by lender and by type of loan. Be sure you understand the terms of your loan and keep in touch with your lender about any questions you may have.

Source: https://studentaid.gov/understand-aid/types/loans/federal-vs-private

 

Federal Student Loan Types

For the majority of this article, we’ll be focusing on federal student loans as they are the most commonly used and have standardized policies and payment options. There are a few different types of Federal Student Loans:

Direct Loans (a.k.a. Stafford Loans)

  • Subsidized – Government pays the interest while you’re in school.
  • Unsubsidized – You are responsible for paying the interest while you’re in school.
  • PLUS – Given to graduate students and parents of undergraduate students.
  • Consolidation – Used to combine multiple federal loans into one monthly payment with a fixed interest rate.

Federal Family Education Loan (FFEL) Program– No new FFEL loans have been issued since 2010. If you have an FFEL loan it may affect which repayment plans you’re eligible for.

Servicers

Another key thing to know is who your loan servicer is. A loan servicer is a company that handles the billing and account services of your student loans. They act as the middleman between you and the government and can help you resolve issues regarding payment, as well as work with you to find the payment plan to best fit your circumstances. 

The servicer is there to help make sure your loans are kept in good standing. Remember, they are there to work with you, not against you! When in doubt, call your servicer to see how they can structure your loan payments. If you don’t know who your servicer is, check your most recent bill or loan statement. If you’re still not sure, call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243.

When do I begin making payments?

Once you’ve graduated, leave school, or drop below half-time enrollment status you have six months before you must start making payments. This six-month window is called the grace period and is the time period where you are not required to make any payments. However, interest may still accrue during your grace period if you have unsubsidized loans. If you have unsubsidized loans, you may want to consider making interest payments to prevent the interest from being added to your principal balance (a.k.a. interest capitalization) at the end of your grace period.

PLUS loans given to graduate students don’t have a grace period but are put into an automatic six-month deferment when the student leaves, graduates or reduces their enrollment to half-time which essentially generates the same effect. Parent PLUS loan borrowers don’t have an automatic deferment but can request a six-month deferment from their servicer.

What repayment plan options do I have?

Standard Payment Plan

This repayment plan is one of the easiest to understand. You can qualify for this type of payment plan if you have Direct Loans (Subsidized, Unsubsidized, PLUS, Consolidation), FFEL PLUS or consolidation loans. The Standard Payment Plan is designed to have you pay back your loan over 10 years. If you have a Direct or FFEL consolidation loan, your payment period will be between 10-30 years depending on the total amount you owe.

Generally, your monthly payments will be higher in this plan than others, but you will usually pay less over time than other payment options. Higher monthly payments will pay off your loans in the shortest amount of time and therefore save you the most in interest over the course of your payments. Monthly payments will be a fixed amount, approximately the amount of your loan divided by 120 months (*this doesn’t include monthly interest payments).

Graduated Payment Plan

Graduated plans are similar to standard payment plans in that the same types of loan types are eligible and the payment periods are the same. With these types of plans, you start with lower payments that slowly increase every two years over 10 years. This makes it an ideal plan for people who expect their income to increase steadily over time.

Your monthly payment amount depends on your total loan balance but will never be less than your monthly interest payments or more than three times greater than any other payment plan.

Extended Payment Plan

Extended payment plans are intended for borrowers who need a longer period to repay their loans. The same types of loans that are eligible for the standard and graduated plans are also eligible for the extended plan. To qualify for this plan, you need more than $30,000 in outstanding Direct and/or FFEL loans. For example, if you had less than $30,000 in FFEL loans but more than that in Direct loans, you would be able to use the extended payment option for your Direct loans, but not for your FFEL Program loans.

Monthly payments can be a fixed or graduated (increasing every two years) amount and are paid out over 25 years. Your monthly payment will generally be lower than the standard or graduated repayment plans, but you will usually pay more over time in interest.

Income-Driven Payment (IDR) Plans

These types of payment plans are designed to help borrowers that want to make lower monthly payments or those that have high debt levels relative to their income. IDR plans are not available for people with private loans. The most common IDR plans are:

  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Based Repayment (IBR)
  • Income-Contingent Repayment (ICR)

Your monthly payments on IDR plans are a percentage of your “discretionary income.” Discretionary income is defined as the difference of your adjusted gross income (AGI) as reported on your taxes and the poverty guideline amount for your family size and state (100% of the poverty guideline amount for PAYE, REPAYE and IBR; 150% of the poverty guideline amount for ICR).

For PAYE and IBR plans, your monthly payment will never be more than what you would pay on the standard 10-year plan, although it may fluctuate year to year based on your annual income.

For REPAYE and ICR plans, your monthly payment amount will also increase or decrease year to year based on your annual income, however, there is no cap on it. This means that if your income increases enough, your monthly payments may be greater than what you would pay on the standard 10-year plan.

All IDR plans require you to update your family size and income on an annual basis in a process called “rectifying.” Your servicer will notify you when you need to update your information, but you may do so throughout the year if your income changes.

If you have a remaining loan balance at the end of your IDR plan period, the remaining balance will be forgiven. However, any balance forgiven may count as taxable income.

To see if your loans qualify for a certain type of payment plan or to see which option may be best for your situation, try out the loan simulator on StudentAid.gov.

What Kind of Payment Plan Do You Have?

Standard Payment
Period: 10 years 
Amount: Fixed

Graduated Payment
Period: 10 years
Amount: Increasing

Extended Payment
Period: 25 years
Amount: Fixed or Increasing

Pay as You Earn* (Income Driven Repayment Plans [IDR])
Period: 20 years
Amount: 10% of your discretionary income (not more than standard payment)

Revised Pay as You Earn* (Income Driven Repayment Plans [IDR])
Period: 20-25 years
Amount: 10% of discretionary income

Income-Based Repayment* (Income Driven Repayment Plans [IDR])
Period: 20-25 years
Amount: 10%-15% of discretionary income

Income-Contingent Repayment* (Income Driven Repayment Plans [IDR])
Period: 25 years
Amount: 20% of discretionary income

*If the entirety of the loan is not paid off within the period, the remaining balance will be forgiven. Amounts forgiven may count as taxable income. 

These payment plans are for eligible federal student loans. Check with your servicer to see what payment plans you can qualify for. If you have private loans, ask your lender or servicer for payment options.

Other student loan forgiveness options.

You can have your loans forgiven through IDR plans, but that could require over 20 years of payment. IDR plans are not the only way your student loans can be forgiven. They can be discharged due to unfortunate circumstances such as total and permanent disability, death and in some cases of bankruptcy.

Your loans may also be forgiven based on your employment through the Public Service Loan Forgiveness (PSLF) program. This program forgives the remaining amount of your Direct Loan after 120 qualifying monthly payments (10 years of payments) have been made.

A qualifying payment must be made through a qualified payment plan which includes the standard payment plan, or any IDR plans. However, to receive the benefit of the PSLF program, an IDR payment plan should be used. If you use a standard payment plan, you would have paid the entirety of your balance before your loans can be forgiven.

To count as a qualifying payment, the payment must be made for the full amount due and within 15 days of the payment’s due date. Payments made during a grace period, deferment, or forbearance don’t count as a qualifying payment. You must also be employed full-time by a qualifying employer.

Qualifying employers include and government organizations or non-profits that are 501(c)(3) tax-exempt. Full-time volunteering under the Peace Corps or AmeriCorps also counts as qualifying employment.

In general, loan forgiveness only applies to federal loans, but your state may offer loan repayment assistance programs to qualifying borrowers to help pay for private loans as well. To find out which programs your state has, click here.

Should I consolidate my student loans?

Loan consolidation allows you to take all your federal loans and merge them into one Direct Consolidation Loan. This means that instead of having multiple loans, with multiple payment amounts at differing interest rates, you would just have one monthly payment with a fixed interest rate. Consolidating your loans could reduce your monthly payment by extending your loan term or making you eligible for an IDR plan.

However, consolidating your federal loans usually doesn’t save you money in the long run. If you get a longer loan term to lower your monthly payment, you’ll end up paying more in interest. Your new fixed interest rate will be the weighted average of the interest rates of your previous loans. If you consolidate loans with outstanding interest balances, the interest will be capitalized and added to your principal balance.

If you’re considering loan consolidation, remember you can pick and choose which loans you want to consolidate. For example, you may only want to consolidate your loans if you have older federal loans with variable interest rates to give you a new fixed interest rate. Also, remember consolidating loans may change which repayment plans are available to you. If you consolidate a Parent Plus Loan, you may lose the ability to access certain repayment plans. Inversely, if you’re trying to use an IDR plan for a Parent Plus Loan, consolidation might be a good option because it would allow you to use the Income-Contingent Repayment plan (the only IDR plan that can be used by Parent Plus borrowers through a Direct Consolidation Loan).

It’s also important to remember how loan consolidation might affect your progress towards loan forgiveness. If you’re aiming for loan forgiveness through an IDR plan and consolidate your loans, you may lose the credit you’ve accumulated thus far. Consolidating loans basically resets the clock for the number of years you need to make payments before your loans are forgiven. To avoid this, you can always exclude the loans that have IDR plans from the consolidation.

Should I refinance my student loans?

Refinancing your student loans involves taking out a new loan to replace your old one. The reason you would do this is to save money on interest payments over the life of your loan. If current interest rates are lower than they were when you took out your original loan, refinancing may be a good idea.

If you have federal loans, you should consider your options carefully before refinancing because the process would involve replacing your federal loans with a private loan. This would cause you to lose all of the benefits that come with federal loans such as loan forgiveness and eligibility for various repayment plan options.

If you have private loans, refinancing could make sense if you could get a new lower interest rate. Before refinancing compare how much money you would save with your new interest rate. If you have a federal loan, you also need to factor in the difference in spending between paying off your loan in full or aiming for loan forgiveness through IDR plans over 20-25 years.

How to pay off my student loans faster?

Make bi-weekly payments

Switching from monthly to bi-weekly payments could be a money hack that could help you pay down your student loans faster. The concept behind this is simple. You would divide your monthly payments in half and pay that amount every two weeks. Since there are 52 weeks in a year, you would be making 26 payments instead of 12.

Biweekly payments result in making an extra month’s worth of payments without it seeming like you’re paying more than usual.

Example:

 

Annual Payments

Payment Amounts

Total Yearly Payments

Monthly Payments

12

x

$100

=

$1,200

Biweekly Payments

26

x

$50

=

$1,300

 

Double-check with your loan servicer to make sure they can accommodate automatic biweekly payments.

Make extra payments

If you find yourself in a situation where you have extra money at the end of the month, you may want to consider putting more money towards your student loans. Paying more than your normal monthly amount can help you pay off your loans faster and save you hundreds, if not thousands of dollars in interest payments over the life of the loan.

If you want to make extra payments towards your loan, it’s important to know the order of operations of how payments are applied. First, any charges or late fees on your account are paid, then any interest you have accrued over the month and finally, the remainder goes towards your principal balance.

This is important to know if you want to maximize the effect of your extra payments. If you make an extra monthly payment, some servicers will credit your payment amount for the next month instead of using it to pay down your principal balance. This means that your next monthly payment will be lower, but your loan won’t be paid back any quicker.

To avoid this, you want to talk with your servicer about making extra payments and give them specific instructions (preferably in writing as well) about how you want the extra payment to be used. You’ll want to specify that the entire extra payment should go towards paying down your principal balance*.

*Note: this is contingent on you paying off all the interest you accrue in your normal monthly payment. 

What to do if you have trouble making payments.

Deferment and Forbearance

At some point, everyone experiences a financial hardship they haven’t planned for. These situations can make it difficult to make your normal monthly student loan payments. If you’re facing a financial hardship, you may be able to go into a period of deferment or forbearance. In both options, your loan payments are suspended or postponed, however, interest may still accrue. If you don’t pay off the accrued interest, it will be capitalized and added to your principal balance at the end of the deferment or forbearance period.

Generally, to qualify for deferment specific requirements and circumstances must be met. Some examples include being enrolled in school, undergoing cancer treatment, facing economic hardships or military service.

A period of forbearance can be granted by your loan servicer. You can request forbearance if you’re unable to make payments due to financial difficulties, medical expenses or losing a job. Approving a forbearance period is discretionary, meaning that your servicer can consider your unique situation and make an approval decision without the need to meet strict criteria.

Keep in mind that there may be other types of mandatory forbearance depending on your current employment or circumstances. If you meet the eligibility requirements for these types of forbearance, your servicer is required to grant your request.

These options should be used for short-term financial hardships. If you think you’ll have trouble making your monthly payments for a longer period of time, talk with your servicer to see if there’s a more appropriate repayment plan for you.

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