Student loans are a pain. A big, expensive pain. You’d hope that student loan servicers, especially those working with the government, would do their best to make sure you have all the information about how to efficiently pay off your loan and all the programs that you can get. Well, guess again. It falls on you to not only know exactly how you can make your student loan payments work for your budget but also decode the tricks servicers might play, even when you’re trying to pay off your loan quickly. But you don’t have to go in blind. We’re going to go through exactly what you need to know to handle both federal and private student loan serviciers once you’ve graduated and are in repayment.
Federal Loan Options
No one wants to be dealing with student loans, but if you have to, then federal programs provide far more options to establish affordable payments. This is because federal student loans provide access to better repayment programs, such as income-driven repayment plans and forgiveness. However, your student loan servicer isn’t likely to volunteer this information to you or just sign you up. It’s on you to be proactive about getting your loans enrolled in a federal program. You can start getting informed by visiting the Federal Student Aid website.
Option 1: Income-driven repayment plans
Income-driven repayment plans are offered by the federal government as a way to put a cap on how much you’re required to pay each month, even when you have huge loan bills. As the name implies, the cap is based on your income. There is a rather complicated formula used to determine your payment, which is based on the percentage of your discretionary income. Discretionary income is defined as the difference between your income and 150% of the poverty-level income guideline for your family size (which can be just you) within your state. Like I said, it’s a bit complicated. Those on income-driven repayment plans must update information annually as income increases, life events happen (such as marriage or having a baby) and can impact how much you owe. Ultimately, any remaining balance on your student loans will be forgiven after 20 to 25 years depending on the program.
The income-driven repayment plans include:
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Based Repayment (IBR)
- Income Contingent Repayment (ICR)
These programs were not created equally nor are all borrowers even eligible. Be sure to research with legitimate government-backed sites as well as with your servicer and not third-parties to see which one you think is the best fit before proceeding. For those with eligible loans, PAYE and REPAYE have the most favorable terms.
Option 2: Forgiveness
Just as delightful as it sounds – forgiveness is the discharging of your student loans in exchange for service. One of the most well-known programs is Public Service Loan Forgiveness (PSLF). You need to work in some form of public service, which includes teaching for certain public schools, working in government, or being employed by a non-profit. After 10 years of payments (120 payments) any remaining balance on your loans will be forgiven, and currently you won’t have to pay tax on the discharged amount.
You may also be eligible for niche forgiveness programs based on your degree and job or even by your state, so be sure to do your research. For example, New York State offers a student loan forgiveness program specific to nurses. A federal program offers teachers working in eligible districts could get up to $17,500 in student loans forgiven. North Dakota offers a program for veterinarians to repay up to $80,000 in student loan debt. There are lots of niche programs, just turn to Google to do some digging!
Option 3: Deferment and forbearance
Deferment and forbearance is not a form of repayment, but, should you find yourself in a financial hardship you can apply to see if you can press pause on your payments for a period of time. If you’re feeling a budget crunch, it falls on you to ask about it and see if you’re eligible before missing any payments and ending up in default or worse – delinquency.
Remember: you can sign up yourself!
You, yes – you, are more than capable if signing yourself up for any of the federal programs, which are all completely free. There is absolutely no requirement for you to pay a third-party service to enroll you. Unfortunately, there has been a rise of companies preying on the general confusion around student loan repayments. Some go so far as to make it seem that you need to pay them to get enrolled. You’ll hear words like “debt relief”, “Obama Student Loan Forgiveness” or just “Loan Forgiveness” and then a pitch to pay a few hundred bucks to get enrolled. Hang up the phone and then just contact your servicer directly to ask about .
Private Loan Options
Bad news first, you really don’t have as many options with private student loans as you do with federal loans. Private lenders are not inclined to give you a lower monthly payment just because you don’t have the salary you expected to nor are they willing to discharge your debt in lieu of service.
Now that we have the unpleasantness out of the way, here’s what you should know about repaying your private loans:
It’s always better to ask for permission than forgiveness
Yes, the adage is usually the other way around but that doesn’t hold true when dealing with private student loan lenders. Should you hit a rough patch with your money and realize you can’t pay your student loan – then you need to tell your lender to see if you can get an extension. This method isn’t guaranteed to work, but at least calling ahead of time and asking if it’s possible to delay payment may keep your loans from going into default. Defaulting on a loan can have really nasty consequences not only for your credit score but may disqualify you from refinancing your loans to a better interest rate in the future.
Try bi-weekly payments
Ask your servicer if you can start making your payments bi-weekly. This doesn’t mean you’re making double your monthly payment (even though that would be a great goal!) it means you take your monthly payment, split it in half and pay a portion every two weeks. For example, if you pay $300 a month then you pay $150 in week 2 and $150 in week 4.
Why should you do this you may ask? Because it’s a painless way to actually squeeze out an extra student loan payment! If you currently get paid bi-weekly, then you may be familiar with those sweet three paycheck months because of how the weeks of the year shake out. Well, if you start paying bi-weekly, then you’ll also end up making 13 payments instead of 12 in a completely painless way. Making an extra payment can shave both interest and time repaying off your student loans. If the lender doesn’t offer bi-weekly payments, then you can put money in a checking account that way so you’ll have the one extra payment saved up to apply to your loan at the end of the year.
Refinancing: an option for all student loans
Refinancing is one of the simplest ways to repay both federal and private student loans. In basic terms, refinancing is taking out a new loan to pay off an old loan. It sounds rather crazy at first, because why would you want yet another loan?! You want the new loan because it’s a much lower interest rate, which saves you money. You can also consolidate several loans together, which can simplify your payment process.
Who is eligible?
The ideal candidate for refinancing needs to have graduated from college, have steady employment, show a history of making on-time payments to loans and never had loans in default or delinquency.
The catch for refinancing federal loans
There is one big IF to keep in mind before refinancing federal loans. If you planned to use a federal forgiveness or income-driven repayment program, then don’t refinance your loans. As soon as you refinance a federal loan there is no reversing the process and you will no longer be eligible for federal programs.
You don’t have to refinance all your loans
There is no rule that says you must refinance all your loans, which means you could just refinance private student loans and then leave federal alone to stay on an income-driven or repayment program.
One final sneaky thing your lenders may do:
Now that you’re feeling motivated to ditch your student loan debt ASAP, there is one final sneaky trick your lenders may have up their sleeves. Should you decide to start paying above the minimum payment, make sure your extra money gets applied to principal first. Even if it’s just paying $10 (which can actually easily shave 6 months off your total repayment time!) you need to tell your lender you want the extra money applied to the principal balance of your loan. Otherwise, your lender might do something sneaky and apply it to future interest. That’s right, interest that will be charged in the future! That’s why sometimes people start to see $0 due when there is in fact a balance left on a student loan bill. Call up your lender as well as send a letter or email stipulating that exactly which loan you want any extra money above the minimum applied to and that it should go towards the principal balance. You shouldn’t be standing for any of their nonsense!