No matter how you slice it, the cost of college can be quite high. Tuition rates rose by 69% between 2000 and 2021, and they continue to skyrocket. As a result, more and more Americans are taking out student loans to afford a degree. In fact, as of 2021, 13% of Americans had a federal student loan. If you are one of those Americans, you are likely facing the daunting task of continuing to pay off your loans after the extended payment pause during the past few years. You may be struggling to determine the best ways to manage your debt. With that in mind, consider the five suggestions below.
Understand Your Repayment Options
If you have federal student loans, there are a standardized set of repayment options, each of which are described below. You can also use StudentAid’s Loan Simulator to estimate how much you would pay each month under each plan as well as how much you would pay in interest over the life of the loan.
- Standard Repayment Plan: You make fixed payments over the course of 10 years (or up to 30 years for a consolidated loan). You cannot choose the Standard Repayment Plan and also qualify for Public Service Loan Forgiveness. This plan may work for you if you want consistent payments, a relatively short pay-off period, and are a private-sector employee.
- Graduated Repayment Plan: You make lower payments at the beginning, and your payments increase every two years. The repayment period is 10 years for most loans and up to 30 years for consolidated loans. You generally cannot qualify for Public Student Loan Forgiveness under this plan. This plan may work for you if you know your income will increase over time and if you are a private-sector employee.
- Extended Repayment Plan: You make fixed or graduated payments over the course of 25 years. If you have a Direct Loan, you must have more than $30,000 of outstanding direct loans to qualify for this plan. This plan does not allow you to qualify for Public Service Loan Forgiveness. This plan may work for you if you need lower monthly payments and are a private-sector employee.
- Saving on a Valuable Education (SAVE) Plan: Only Direct Loan borrowers are eligible for this plan. Your monthly payments will be 10% of your discretionary income, which will be calculated using your tax return. You can qualify for Public Service Loan Forgiveness with this plan, and even if you aren’t a public-sector employee, all loans under this plan will be forgiven after 20 years of payment (for undergraduate study loans) or 25 years of payment (for graduate study loans). This option may work for you if you want to ensure your loan payments do not consume a sizable portion of your income, if you are a public-sector employee, and/or if you want to take advantage of loan forgiveness after 20-25 years.
- Pay as You Earn (PAYE) Repayment Plan: You are only eligible for this plan if you became a new borrower on or after October 1, 2007, and you received a disbursement from your Direct Loan on or after October 1, 2011. Like with the SAVE Plan, your payments will be 10% of your discretionary income but will never be more than your payments would be on the Standard Repayment Plan. You can qualify for Public Service Loan Forgiveness with this plan. This plan may work for folks with a high debt-to-income ratio who may want to use Public Service Loan Forgiveness.
- Income-Based Repayment (IBR) Plan: You will make monthly payments that equal 10%-15% of your discretionary income. Your payments will never be more than they would be under the Standard Repayment Plan. Similar to the SAVE Plan, outstanding balances will be forgiven after 20 years (for undergraduate loans) or 25 years (for graduate loans). This plan may work for individuals with a high debt-to-income ratio who also want to take advantage of loan forgiveness after 20-25 years.
- Income-Contingent Repayment Plan: Your monthly payment will be the lesser of 20% of your discretionary income or the amount you would pay on a 12-year fixed payment plan. Outstanding balances are forgiven after 25 years, and you can qualify for Public Service Loan Forgiveness with this plan. You must be a Direct Loan holder to qualify for this plan.
- Income-Sensitive Repayment Plan: This option is only available for FFEL Program loans, and you cannot qualify for Public Service Loan Forgiveness under this plan. Your payments would be based on your income, and your repayment period would be 15 years.
Consider Debt Consolidation
Debt consolidation involves rolling all your loans into a single loan and may help you better manage your debt. The pros of student loan consolidation are:
- Simplified repayment: Consolidating your student loans combines multiple loans into a single loan, resulting in a single monthly payment. This can make managing your finances easier by streamlining your repayment process.
- Potential for lower monthly payments: Consolidation often allows you to extend your repayment term, which can reduce your monthly payment amount. This can provide relief for borrowers who are struggling to meet their current monthly obligations.
- Fixed interest rate: When you consolidate your loans, you have the option to secure a fixed interest rate. This can protect you from future interest rate increases and provide stability in your repayment plan.
- Access to alternative repayment plans: Consolidating your loans may open up the opportunity to choose alternative repayment plans, such as income-driven repayment options. These plans can base your monthly payment on your income and family size, making it more manageable and affordable.
The cons of student loan consolidation are:
- Extended repayment period: Consolidation can potentially lengthen your repayment period, resulting in more total interest paid over time. While this reduces the monthly burden, it may increase the overall cost of the loan.
- Loss of certain benefits: If you consolidate federal student loans into a private consolidation loan, you may lose certain benefits associated with federal loans, such as income-driven repayment plans, loan forgiveness programs, and deferment or forbearance options.
- Potential for higher interest rates: If you consolidate variable-rate loans into a fixed-rate consolidation loan, you may end up with a higher interest rate than before. This could increase the overall cost of your loan.
- Restarting the clock on loan forgiveness: If you have been making payments towards loan forgiveness, such as Public Service Loan Forgiveness (PSLF), consolidating your loans may reset the clock, and you would need to start the forgiveness process anew.
Utilize Public Service Loan Forgiveness
If you have ever worked for a non-profit or government organization, you might be eligible for Public Service Loan Forgiveness. The eligibility criteria are as follows:
- Employment: You must be employed full-time by a qualifying public service organization, such as government organizations (federal, state, local), non-profit organizations (501(c)(3) tax-exempt status), or other types of non-profit organizations that provide public services.
- Loan type: Only federal Direct Loans are eligible for PSLF. If you have other types of federal loans, such as FFEL loans or Perkins loans, they may become eligible if you consolidate them into a Direct Consolidation Loan.
- Repayment plan: You must be on an income-driven repayment plan, such as Income-Based Repayment (IBR), Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), or Income-Contingent Repayment (ICR). Only payments made while on an eligible repayment plan count toward the required 120 payments.
- Payment requirements: You need to make 120 qualifying monthly payments, which must be:
- Made after October 1, 2007.
- Made while working full-time for a qualifying employer.
- Made under a qualifying repayment plan.
- Made for the full amount due, no later than 15 days after the due date.
Set Up Automatic Payments
Some private and federal student loan lenders offer a discount on the interest rate if you agree to set up your payments to be automatically withdrawn from your checking account each month.
Use the Debt Avalanche Strategy
The debt avalanche strategy is a method of repaying debt that prioritizes paying off debts with the highest interest rates first, while making minimum payments on other debts. Here’s how the debt avalanche strategy typically works:
- List your debts: Make a comprehensive list of all your debts, including credit card balances, student loans, personal loans, or any other outstanding debts. Include the total amount owed and the respective interest rates for each debt.
- Order by interest rate: Arrange your debts in descending order based on their interest rates, from highest to lowest. This will help identify the debt with the highest interest rate, which you’ll focus on paying off first.
- Minimum payments: Make minimum payments on all your debts to ensure you meet your obligations and avoid any penalties or late fees.
- Allocate extra payments: Allocate any extra funds you have available for debt repayment toward the debt with the highest interest rate. This means you’ll pay more than the minimum payment on that particular debt while making minimum payments on other debts.
- Repeat the process: Once you have paid off the first debt with the highest interest rate, move on to the debt with the next highest interest rate. Take the total amount you were paying toward the first debt (minimum payment plus any extra funds) and apply it to the second debt. This creates a snowball effect as you eliminate each debt and roll the payments into the next one.
If you need any support in managing your student loans, contact our financial planning team to set-up a consultation.