you need to manage your loan repayment stress free.
you need to manage your loan repayment stress free.
Part 1: Repayment
So, how do I pay my loans back?
It is important to understand that there are two types of loans: federal and private. Repayment begins at different times depending on which type of loan and when it was awarded, which can be confusing.
For Direct Federal Loans, there is a 6 month grace period after the day of graduation. Some choose not to use this grace period is (1) they are considering the Public Service Loan Forgiveness program or (2) they are avoiding interest charges on specific federal loans that accrue interest during this period.
When making a plan to start repayment, it’s necessary to take an inventory of the type of loans you have – both federal or private. To see your federal loans, you can check the National Student Loan Debt System. To see all outstanding loans – both federal and private, you can check your credit report. Remember that Parent PLUS loans are listed under the parent’s name, not the student.
9 Repayment Methods
For Federal loans, the government offers 9 different repayment methods that fall into three categories: Fixed Payment, Variable Payment, or Income Driven Payment (IDR). These are explained below.
FIXED PAYMENT
These methods have a fixed monthly repayment amount for the life of the loan.
STANDARD TEN-YEAR REPAYMENT
This loan payment is a fixed amount and is paid off in ten years or 120 payments. This is the default repayment method and can be used for all federal student loans. It will offer the lowest total loan repayment cost and shortest period of repayment. It also qualifies for the PSLF program.
However, this will be the highest flat payment of the plans at the original start date of repayment.
EXTENDED REPAYMENT PLAN
This is a fixed monthly repayment amount and the number of years is based on the outstanding loan balance. Therefore, the monthly payment will be lower than the ten-year plan, can be extended 25 and 30 years if consolidated, and has the lowest fixed payment without loan balance increasing.
However, it’s the most expensive repayment total over the life of the loan and is not valid for PSLF.
VARIABLE REPAYMENT
These methods have varying monthly repayment amounts.
GRADUATED REPAYMENT
This repayment is lower at first, then increases every two years. It finishes in ten years or 120 payments. It begins affordable but can become expensive at the end.
EXTENDED GRADUATED REPAYMENT PLAN
INCOME DRIVEN PAYMENT (IDR)
These are increasingly popular, however it is important to remember that many times the IDR does not pay the loan interest, so the loan balance will continue to grow. This is called negative amortization and can occur when the monthly payment is less than the interest that is charged each month, which causes the balance of the loan to increase. Because of this, it is important for borrowers to be aware of the interest charge per month.
The IDR methods are:
Part 2: Loan Forgiveness
Are you eligible for loan forgiveness? Let’s find out.
The PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.
In order to qualify, you must first work full time for the government or a nonprofit organization that is approved by FedLoan Servicing. If your employment meets the criteria and you move all your federal loans to the direct program, you are on your way to the Public Service Loan Forgiveness program.
Additionally, for people working in the areas of education and health care, there are other forgiveness programs that will forgive federal student loans that are not direct loans.
Does your payment method qualify? If it’s on this list, then yes!
- Standard repayment (ten-year)
- Income-based repayment (IBR)
- Income contingent repayment (ICR)
- Pay as your earn (PAYE)
- Revised Pay as you earn (REPAYE)
If your employment meets the criteria and you use one of the listed methods, and you make 120 (ten years) on-time direct federal loan payments, you will qualify for PSLF. The 120 payments do not need to be sequential.
- Other methods, such as standard, extended, and graduated, do not have forgiveness because the debt will be repaid within the timeframe selected.
Volunteer services such as AmeriCorps, Peace Corps, and Volunteers in Service to America are all organizations that offer additional loan repayment contributions against your student debt.
There are additional loan forgiveness programs specifically for teachers.
Part 3: Refinancing Student Loans
Once you are graduated and earning an income, you may be in position to refinance you loan. When you refinance, your new lender pays off your existing student loan and issues you a new, private student loan. This is an opportunity for a lower overall interest rate.
It is often thought that federal loans have the lowest interest rates, which is not necessarily true. The federal government offers the same interest rate to all borrowers, regardless of credit history or income. Private lenders, on the other hand, consider a number of criteria when setting an interest rate such as:
- Strong monthly cash flow
- Healthy credit
- Demonstrated financial responsibility
- Current employment or job offer
- An accredited degree
When you initially entered school, it is likely that you did not meet all of these criteria. Thus, a private lender would have offered you an interest rate higher than the federal rate. However, as a graduate, you may meet these criteria and be eligible for a lower overall interest rate.
It is possible to combine federal and private student loans when refinancing, and even combine previously consolidated federal student loans with private loans (for more on loan consolidation, see here). However, it is important to remember that when you refinance federal student loans, you will lose most flexible student loan repayment plans and certain protections offered by the federal government. When a lower interest rate or better overall terms are your biggest priority, refinancing is for you.
If refinancing seems like a good option, the process is quite easy:
- Apply: applications are all online and you can receive an interest rate within minutes.
- Choose you loan: select a fixed or variable interest rate. Chose your loan term and how fast you want to pay it off.
- Submit documentation online:
- Government-issued ID (Driver’s license or passport)
- Transcripts or Diploma to verify your degree
- Payoff statements for your current lender
- Monthly rent amount or mortgage payments
- Two most recent pay stubs or tax returns (or offer letter for employment)
- Lender will review your application.
- Approved!
- Review disclosures and sign loan documentation
- Your loan is dispersed!