Your student loans might not have kept you up at night when you were in college, but everything changes when your first bill arrives and the reality of how much you owe sets in.
Luckily, as a federal student loan borrower, you have six repayment plans to choose from to keep your monthly payments affordable. Follow these three steps to make sure you’re on the plan that makes the most sense for you.
Step 1: Understand all your options
Around the time you graduate, you’ll be required to go through an online exit counseling session on the government’s Federal Student Aid website. There, you’ll choose a repayment plan, which determines how much you’ll pay each month to your student loan servicer. The plans you’re eligible for depend on your total loan balance, the types of loans you took out and, in some cases, how much you earn. These are your options; click on the links for more detail:
Standard repayment: Pay a fixed amount of at least $50 a month over a period of 10 years. If you don’t pick a different plan, the government will put you on this one by default.
Best for you if: You can afford the monthly payment, you want to pay off your loans quickly and you’d like to save money on interest.
Income-based repayment (IBR): One of three income-driven repayment plans available to you if your monthly loan payment on the standard plan is more than 10% of your discretionary income (or 15% if you took out your first loans before July 1, 2014). Your payments will be tied to your earnings, and your remaining loan balance will be forgiven after 20 or 25 years, depending on when you took out your loans.
Step 2: Consider additional ways to simplify or lower your loan bill
Sticking with the same repayment plan until your loans are paid off isn’t your only choice. In some cases, you could have your federal loans canceled; you could bundle multiple separate loans into one; or you could refinance them with a private lender to get a lower interest rate. Here’s how.
Loan forgiveness: Graduates working for the government or qualifying nonprofits can have their federal loans forgiven after 10 years of payments through Public Service Loan Forgiveness (PSLF). Choose an income-driven repayment plan while you’re paying off your loans to maximize your savings under PSLF. Teachers should also look into Teacher Loan Forgiveness and Perkins loan cancellation, which could dissolve up to 100% of your Perkins loans when you teach in qualifying communities and subject areas.
Best for you if: You work in public service and are already on — or are willing to switch to — income-driven repayment.
Consolidation: Federal loan consolidation gives you a single monthly payment and interest rate, making your loan payments easier to keep track of. It will also make certain federal loans eligible for repayment under income-driven plans and PSLF. Your new interest rate will be a weighted average of your prior loans’ rates, rounded up to the nearest one-eighth of 1%. Your repayment term will be determined based on your total balance, but it could extend to a maximum of 30 years.
Best for you if: You want a single monthly payment for study loan but you don’t qualify for refinancing, or you want to maintain benefits like PSLF specific to federal loans.
Step 3: Choose a plan that allows you to make all your payments on time
If any of your loans go unpaid for three months, the government will report it to the credit bureaus, which will lower your credit score. That will make it less likely you’ll receive favorable interest rates on a car loan or mortgage, or that you’ll get approved for an apartment. After nine months of missed payments, your loans will go into default.
Avoid late or missed payments by setting up automatic debit with your loan servicer, which will withdraw your payment directly from your bank account each month. Most servicers give you a discount on your bill for enrolling. Also, let the company know as soon as you think you’ll have trouble affording your bill. Don’t ignore your loans if you can’t afford them; opt for deferment or forbearance, which temporarily postpone your payments, if you lose your job or experience other financial difficulties.
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