Wherever you are in your relationship with student loans — the horrifying honeymoon (I have to pay back how much!?) or the later years of relentless payments that leave your bank account as dry as a desert — it pays to review your student loan repayment options now and then to make sure:
- You’re paying them down efficiently and
- You’re not paying more than you must.
Sadly, even though so many of us have student loans, most of us know very little about them. Let’s change that.
Student loan consolidation
When you applied for student loans, it’s very possible that you took out more than one type of loan. From federal Perkins and Stafford loans to private loans from your bank, when it’s time to pay them back, you may feel like your head is spinning.
Wouldn’t it be easier if you could pay all of them at once?
It does sound simpler, but it’s not always a realistic — or smart — option.
Combining your loan payments under a single lender is called “consolidating” the loans. Basically, when you consolidate your loans, you apply for one new loan that will pay back the smaller loans you already took out. It will have its own terms and interest rate.
The promise of consolidation is appealing: You would get one monthly payment instead of several and, in some cases, may be able to lower your interest rate or obtain a more affordable monthly payment by extending the term of the loan, or how many years you take to repay the loan.
But before you jump at the chance to consolidate, here’s what you should know.
1. Are your loans federal or private?
If some of your loans are federal, but others are private, you can’t consolidate all of them together. Many students have a combination of federal and private loans, so combining ALL of them into a single payment will likely not be an option.
If you have federal loans, there may not be any financial benefit to consolidating them, versus paying them separately. Before 2006, consolidating student loans was a smart financial decision at times, because federal student loans had variable interest rates. If you were nervous about your rate going up, you could consolidate your loans under a fixed interest rate when it was low. Now, that benefit no longer exists.
For private loans with variable interest rates, consolidating at a lower interest rate is a smart move, but may only be available if you have the good credit and income to support taking out the new loan. If you’re considering consolidation? We recommend CUStudentLoans, a network of non-profit credit unions that provide private consolidation loans at rates as low as 4.49 percent.
2. Can you make your payments on time?
The longer you take to repay a loan, the more interest you’ll pay. For example, if you repay a $20,000 loan at 6 percent interest over 10 years, you’ll pay about $6,645 in interest. If you pay it back over 20 years, you’ll pay $14,389. Doubling the term of the loan results in more than twice the interest!
Sometimes you simply can’t afford a loan’s monthly payment, in which case you may need to adjust or consolidate your loan into a longer term.
But if you can afford to make your current student loan payments, paying your loan faster is better.
3. Are you in default?
If you have defaulted on your federal student loans, consolidating could be a way out. Your rate will go up if you consolidate, but you can begin a Direct Consolidation Loan, which means some collections will stop. Just remember: This is only an option for FEDERAL student loans, not for private ones.
4. Are you trying to eliminate a co-signer?
If you don’t want your parents or other co-signer to be in control of your loan, consolidating may be a good option for that reason. Some loan consolidations offer the option of taking a co-signer off the loan after a substantial amount of time spent paying them back.
5. Have you done your research?
Student loan repayment options
The most important step after taking out a student loan is to make sure you’re informed about all its fine print … including the potential different ways to repay it.
If you had previously started a plan to pay the loans back that you don’t like, contact your lender as soon as you can to see if it’s possible to change it.
If you have taken out federal student loans, there are several options for paying them back that you may want to explore. Check out this great chart from the U.S. Department of Education to learn more, or read a quick rundown here:
Standard repayment plan – This plan is pretty simple. You’ll pay a fixed amount monthly, starting at a minimum of $50/month. You have up to 10 years to pay the loan back in full. The standard repayment plan is known for requiring less interest than other plans.
Graduated repayment plan – Just like it sounds, on this plan you’ll start with lower payments and increase gradually. The amount you’re paying back will increase every two years. You have up to 10 years to pay the loan back on this plan as well.
Extended repayment plan – Under this plan, the time you have to pay back your loans is “extended” … up to 25 years. (Keep in mind, as we noted earlier, that means you’ll be paying quite a bit in extra interest — more than the standard or graduated repayment plans).
Income-based repayment plan – To qualify to repay your loans this way, you must be able to show some financial hardship. If you can, you’ll begin to pay your loans back at a rate determined by your income. The maximum you’ll pay is 15 percent of your discretionary income. Under this plan, you have up to 25 years to pay the student loans back.
Pay-as-you-earn repayment plan – The maximum payment for this plan will be 10 percent of your discretionary income, and you’ll have up to 25 years to pay your loan back. It’s different from the income-based plan because your payments will increase as your income increases. The outstanding balance on your loan can be forgiven if you’re not able to pay the loan back in full after 20 years of required monthly payments.
Income-contingent repayment plan – You have up to 25 years to pay back your loans on this plan. Your payments will be determined by your adjusted gross income and family size.
Income-sensitive repayment plan – Lenders’ policies can vary, so make sure you understand yours and how much you’ll be required to pay back. Your monthly payment will be determined by income, and you’ll have up to 10 years to pay the loans back.
Student loan forbearance and deferments
If you cannot pay your student loans back, DO NOT simply stop paying and ignore them! Unfortunately, many people do not understand how serious failing to repay federal student loans can be.
It’s not just that you’ll ruin your credit and debt collectors will hound you; it’s way worse than that.
When you default on a federal student loan, the government may garnish your wages or tax refunds and place liens on your property. You may also lose the ability to receive federal benefits like Social Security. Even if you declare bankruptcy, you may not be able to discharge federal student loans.
So if you’re having trouble paying your student loans, CALL your lender! You may qualify for forbearance.
Forbearance is a temporary allowance to either reduce or stop your student loan payments for up to 12 months. To qualify, you must show you have struggled with financial hardship or an illness. Interest will still accrue on your loan during that period of time, when you’re not paying, but this period will give you time to get on your feet and hopefully be in a better position to repay the loans.
Before investigating forbearance, you can also see if you qualify for a student loan deferment. If you do, you will be exempt from paying both your loan and its interest for a period of time.
Student loan forgiveness programs
Programs exist that will forgive some or all of certain student loans if you enter certain career fields or work in specific positions for a minimum number of years. Forgiveness programs can be generous and, as a result, also competitive.
Here’s a sampling of student loan forgiveness programs to get you started.
- For teachers: The American Federation of Teachers, a state-by-state directory of forgiveness programs
- For medical professions: The Association of Medical Colleges
- For legal professions: The American Bar Association
- For volunteers: AmeriCorps or Peace Corps
What’s been the hardest part about figuring out your student loans? What specific questions can we answer for you or research for future posts?