We’ll take a look at both federal and private student loan repayment options.
Federal Student Loans
Federal student loans are those backed by the government. They make up the vast majority of student debt. They also offer a wide variety of repayment options.
Pay Early
If you can at all manage it, start repaying as soon as possible. After you graduate, there is a six month grace period when no payments are necessary. Though many claim that this is not enough time to obtain adequate income, experts suggest starting to pay them off immediately after graduating. This cuts down on the interest expense you incur later on and can also help you get into the mindset of repayment.
Choose the Right Repayment Schedule
Many student loan borrowers don’t realize how wide a variety of repayment schedules are available to deal with federal loans. If you don’t choose a particular repayment plan, the servicer will automatically classify your loan under a standard 10-year period. That means your payments will be based on what you owe and you’ll make equal payments every month for 10 years. For many students, that’s not the best choice. Federal student loans can be paid off with a number of income-dependent payment plans. That means your payments will be based on your income, not on what you owe, so the payments stay affordable. You may end up paying over a longer period of time than the standard 10 years, but you’ll actually be able to afford the payments. If your circumstances change, you can change your payment plan as long as your account is current. If you default, however, you will lose eligibility to switch to a more manageable income-based repayment plan. So, you need to act early to ensure that you can keep your account current. Check out the different income-dependent payment plans here.
Get Deferment or Forbearance
In addition to choosing a repayment schedule, you may be able to qualify for deferment or forbearance for specific financial struggles. For example, if you contract a serious illness and have to pay for expensive treatment, you may be able to have your student loan payments pushed back until you can make payments again. If you qualify for a deferment, you won’t have to make payments and your loan will stop accruing interest. If you qualify for forbearance, you won’t have to make payments but you will continue to accrue interest during the time in which you’re not making payments.
Consolidate Your Loans
If you have multiple smaller federal student loans, consolidating them into a single loan can make payment more affordable and easier to keep track of. When you consolidate your loans, you’ll typically extend your payment period to up to 30 years. That will make your payments lower every month, but you’ll pay more interest over the life of the loan. Learn more about loan consolidation here.
Use Smart Tax Planning
Taxes can prove to be important in paying off a student loan as well. When calculating repayment amount, the government looks to household adjusted gross income. This means that if the your spouse’s income is significantly higher than yours and you file taxes together, the repayment amount maybe out of your reach. Filing separately may make your payments lower. Note that there are possible negative effects of filing separately, too. For example, it may limit the amount of deductions that are available, such as the child and dependent care credit, the earned income tax credit, and the hope or lifetime learning educational credits.
Consider Your Career
We know that making a career choice is tough, but a careful decision can make a big difference in your student loan repayment journey. Getting a job in public service can have big benefits – like forgiveness of your student loans. Working for the government or a not-for-profit will typically allow you to qualify for complete loan forgiveness after a 10-year period. You do have to meet certain requirements for forgiveness in addition to the public service job. For example, you need to continue to make payments on your loan for the 10 years that you’re working in public service. Of course, you can use the income-dependent repayment programs to keep those payments manageable.
So, what counts as a public service career? You can work in law enforcement, early childhood education, public safety, military service, at a school library or in most administrative positions in a school, among others. Not all jobs in public service are eligible for loan forgiveness. For example, jobs at labor unions or at political organizations that have a partisan slant don’t fulfill the requirements. Work at religious organizations may qualify, but jobs that are specifically related to proselytizing don’t qualify you for loan forgiveness. So, teaching at a religious school may qualify you for loan forgiveness but a job handing out pamphlets about the church does not.
Finally, teachers have their own special loan forgiveness program. If you work in a qualified low-income school or in an area with a shortage of schools or teachers, you may qualify for forgiveness of some or all of your loan. For more information on loan forgiveness for teachers, click here.
If you’re not sure whether a career qualifies, reach out to the Federal Student Aid Office for guidance in your specific case.
Private Student Loans
Private student loans are loans from private lenders, such as banks. They come with almost none of the benefits afforded federal loans. Like federal loans, private student loans are neatly impossible to discharge in bankruptcy. In addition, private loans do not qualify for deferment or forbearance. Interest rates also tend to be higher for private loans than federal ones. So, you should make sure you’ve exhausted your options for federal aid before you seek private student loans.
Should a private loan be your only option, you should take a very realistic look at what you expect to earn in the year after graduation. Private student loans should be paid off as quickly and efficiently as possible as they only get harder to deal with over time. While federal lenders are required to work with you on your repayment plan of choice, private student lenders are not required to work with you at all. If you don’t pay, they’ll sue for collection just like any other lender would.
Of course, private loans aren’t all bad. One of the upsides is that borrowers may be rewarded for good behavior. For example, if you set up automatic payments, banks will sometimes lower your interest rate by up to 0.25%. That won’t reduce your monthly payment amount, but it does lower the amount that you’ll pay overall. In addition, many banks offer to release co-signers from responsibilities once the borrower has made a certain amount of on-time, consecutive monthly payments. That means your loan is off of your parents’ plate (and credit record).
Looking for Options?
These are just a few of the many small tricks that can help you when it’s time to start paying student loans. Each of these can lighten the load and make repayment a little easier. If you need help using any of these options or have questions about student loans or debt in general, contact one of our experienced local attorneys for a free consultation.
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