If you have college
or graduate school student loans, you may be wondering – what is the best
student loan repayment plan for me?
The right repayment
plan for you will depend on your income, credit history and many other factors
such as your ability to support higher monthly repayments. This article looks
at how to pick the best student loan repayment plan for you.
Federal
Student Loan Income Driven Repayment Plans
If you have a federal
student loan, your monthly repayments may depend on your discretionary income,
which is defined as the amount by which your adjusted gross income exceeds the
poverty line.
The most common are:
·
Income Based: Pay 10-15% of your discretionary income over a 25-year
term.
·
Pay as You Earn: Pay 10% of your discretionary income over a 20-year
term.
·
Income Contingent: Pay the lesser of two options, being 20% of your
income over a 25-year term, or a fixed amount over a 12-year term.
Another
advantage of income driven
repayment plans is that once you finish the stipulated repayment
term, all remaining student debt is forgiven.
Prepayment
On Federal Student Loans
If you have
sufficient income, you may be able to repay your student loans early. This
gives you the benefit of paying less over the life of your student loans, as
less interest will accrue. For instance, if you have a $200 per month loan
repayment, but you pay $250 instead, the extra $50 can go towards reducing the
principal of the loan, minimizing future interest.
As best practice,
make sure you communicate in writing with your lender about any prepayment to
be sure that it goes towards paying off the loan principal, and not towards
your next loan payment.
Reducing
Federal Student Loan Interest Rates
Looking for lower
interest rates on student loans can be a good strategy, but there are several
important factors to consider. For example, the Standard Repayment Plan for
federal student loans provides the shortest repayment term, however, repayments
start at a fixed amount of at least $50 per month.
For federal
student loan repayment plans, generally if you make higher
repayments each month (i.e. prepay), less total interest will accrue,
potentially resulting in significant savings over the life of the loan.
Student Loan Deferment
Deferment of a student loan means that you are given extra time
before you start making repayments, for example during the first year after
graduation while you search for full-time employment.
Other reasons for deferment might include illness, further
education, major injuries, or unemployment. Keep in mind that interest on the
student loan continues to accumulate during deferment, making your total
overall repayments more costly (except in the case of certain federal loans such
as Perkins Loans and Federal Subsidized Loans).
Deferment may be beneficial if your income grows substantially
within a few years and repayment is difficult in the short term. However in
most cases, deferment results in an increased total debt burden if interest
accrues during this period.
While almost all student loan can
potentially be refinanced, it’s important to be aware that refinancing your
federal student loans may result in the loss of certain federal protections and
benefits.
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