In this article, we are exploring the many different options that are available for paying student loans.
Student loans are an unfortunate reality because it puts graduates immediately in a negative net worth situation.
However, more important than those loans is the education, career skills, and marketability of the education that these loans facilitate.
For students who have taken out student loans, there is a “grace period” but once that period ends, it is time to start paying student loans.
Many Options Available for Paying Student Loans
These days students have many options to choose from when it comes to making student loan payments.
Here are some of the most popular student loan repayment plans:
Standard Loan Repayment Plan
If you’re a federal student loan borrower you are more than likely to start out on a standard repayment plan. This is a good option to choose if you want to have a fixed loan (usually for 10 years) with equal monthly payments.
This is helpful if you want to pay less interest and if you want to get rid of the loan faster.
Extended Loan Repayment
With the extended repayment plan, you can choose to increase the length of your loan period up to 25 years.
This plan is great for students that are looking to have lower monthly payments and it gives you the option to choose between fixed or graduated payments.
Graduated Repayment Plan
The graduated repayment plan gives you a period of 10 years to repay your loan. This plan starts off with low payments that gradually increase over time.
If you’re expecting your income to get a nice boost in the future, then the graduated repayment plan might be a great option for you, especially if you want to pay off your debt faster.
Pay As You Earn Plan (PAYE)
With a 20 year term, the Pay As You Earn (PAYE) is an income-driven repayment plan that sets your monthly payments at 10% of your discretionary income.
A great thing about this plan is that you will never pay more than you would if you were on a Standard Repayment Plan.
If you don’t have an income that significantly fluctuates every year, then this might be a good plan for you.
Revised Pay As You Earn Plan (REPAYE)
The REPAYE plan is another income-driven repayment plan, and similar to PAYE, it also sets off your monthly payments at 10% of your discretionary income.
The repayment period is either 20 or 25 years, and any balance that’s left to be paid after that time can be forgiven.
In order to get access to this plan, you need to have federal direct loans.
Income-Based Repayment Plan (IBR)
The IBR plan has a term of either 20 or 25 years (depending on when you got your first loan) and it sets your monthly payments between 10% and 15% of your discretionary income.
The monthly payments are based on the income generated in the prior year and it gets recalculated accordingly.
It’s a great repayment option for those that have a lower income and a big debt balance. You will also be eligible for public service loan forgiveness after 20 (or 25) years of student loan payments.
Income-Contingent Repayment Plan (ICR)
All federal loan borrowers are eligible for the ICR plan. The contingent federal loan repayment plan can be paid over a period of 12 years with monthly payments that are 20% of your discretionary income.
The absolute maximum repayment period is 25 years, and any balance that is left can be eligible for forgiveness.
Trouble Making Student Loan Payments?
Given the economic cycles that the world rolls through every few years, there are times when it could simply be impossible to find employment.
This means that paying student loans on your file will need to get put on hold.
However, the last thing you will want to do is to default on your payments, so tending to the task of dealing with these loans is something you should do sooner rather than later.
With Federal Student Loans, there are many options that you have to defer making those payments.
This does not mean that you will never be paying student loans, but under some circumstances, you can qualify for a couple of different options.
Deferment – What It Is & How To Use It
Deferment is one option that is available to students who are having trouble making their student loans payments.
What this option does is allow you to postpone making those payments for a specified amount of time.
Unemployment and hardship qualify under this program. In some situations, you will have to make interest-only payments to the loan or you can capitalize that interest (add it to what you already owe) in other cases.
Forbearance – What It Is & How To Use It
Forbearance is another option that you can pursue if you are having a difficult time paying student loans. Forbearance allows the student to postpone their payment for periods of up to 12 months to a maximum of 3 years in total over the life of the loan.
This option is available through your lender (so start there). During this period, interest accrues for periods of forbearance. It is important to notice that you have to continue making payments until your lender approves your application for forbearance.
Benefits of Making Student Loan Payments
While students loans are a big burden for many graduates, there is actually a big plus to them as well; they establish creditworthiness and establish a capacity to repay debt.
This is particularly true for students who are looking to convince a lender that they are worthy of a mortgage once they graduate and get their first real job.
As well, whether it is obvious at the time or not, making student loan payments also instills value in proper budgeting and cash management, something that a lot of people have trouble with (but do not realize it until it is too late).
So while student loans may seem like a terrible evil, particularly at times when making those payments is difficult or impossible, or at times when the cash resources could be better used elsewhere, there are some decent personal-finance benefits that come with that territory.