Written by Liz Word under the direction and review of Lorna Saboe-Wounded Head.
Student loan repayment can often seem daunting and anxiety provoking, but there are many resources you can use to navigate the repayment process. The first step is to determine what type of loans you have then determine who is the loan servicer. If you have federal loans, you can identify the loan servicer at the National Student Loan Data System. Or rather, if you have private (non-federal loans) you will need to contact the lender to update your address and arrange payments with them.
This article will focus on the various student loan repayment methods, as well as consolidation of student loans. This article functions as a roadmap to help the new graduate navigate the repayment process, but note that everyone’s situation varies and it is important that the graduate consult with the lender of the loans to develop a financial plan of action that is specific to their needs.
There are many ways to pay back federal loans and it is vital that you do not ignore student loan paperwork. Failure to pay reduces options for repayment plans, as many repayment plans require loans to be in good standing to qualify. Note that not all loans are eligible for all repayment plan options.
Traditional and income-driven are the two main types of loan repayment options.
Traditional Repayment Plans
Most start with this payment plan because it has fixed payments of at least $50 per month for up to 10 years.
- Allows borrower to pay the least amount of interest.
The payment is lower the first year and then progressively increases every 2 years for up to 10 years.
- Although you will pay more interest over time, this is a good option if you know your salary will increase overtime.
The payment is fixed or graduated for up to 25 years. The monthly payments are lower than that of standard and graduated repayment plans; however, you will pay more interest over the life of the loan.
- You must have an outstanding balance of $30,000 or more to qualify.
- Only for new borrowers as of October 1998.
Income-Driven Repayment Plans
Income-Based Repayment (IBR)
Payment is generally 10 to 15 percent of discretionary income. Payment changes as your income changes, but it will never be higher than the standard payment amount.
- The length of repayment can last up to 25 years; however, if you have made consistent payments the loan can be forgiven. Note that you may have to pay income tax on any amount forgiven.
- In order to qualify for IBR, you must exhibit financial hardship.
- Must be a new borrower after July 2014.
Pay As You Earn (PAYE)
Payment is limited to 10 percent of discretionary income. After 20 years of on-time payments, the loan is forgiven, and you may have to pay income tax on any amount forgiven.
- To qualify for PAYE, you must exhibit financial hardship.
- PAYE is only available for new borrowers on or after October 1, 2007 and have received a disbursement of a Direct Loan on or after October 1, 2011.
For a detailed explanation of student loan repayment options visit the Federal Student Aid website.
When you consolidate your student loans, you are simply combining several student or parent loans into one larger loan from a single lender. The benefit is to provide an opportunity for alternative repayment plans, making monthly payments more manageable. As well as locking in interest rates to a fixed amount. Consolidation allows for longer repayment terms, up to 30 years depending on individual cases. It is not advised to consolidate federal and private loans. Federal loans provide optional payments plans, private loans do not. If Federal and private loans are consolidated, you lose the opportunity to qualify for the optional payment plans provided through the Department of Education.
Student loan consolidation may not be for everyone—to learn if this is right for you visit:
It can be difficult to pay your student loans if you are experiencing a financial hardship, like losing your job or a family member is sick and you have to take extended leave of absence. Consequences do arise when you cannot make your student loan payments; however, there are options you can choose for a temporary cushion. Deferment and forbearance offer ways to postpone or lower your student loan payments for a short period of time—this can help you avoid default.
Payment of both principle and interest is delayed. If you have a subsidized federal loan, the government pays your interest during the deferment period. Conversely, if you have an unsubsidized federal loan, you must pay the accruing interest or it will start to build up. The consequence of failing to pay interest on your unsubsidized loan during a deferment period is capitalized interest and the amount you pay in the future will be higher. To see if you qualify for deferment visit the Federal Student Aid website.
You stop paying or pay a lesser amount on your student loan for up to 12 months. Like the deferment process, interest will continue to build during forbearance, even on subsidized loans. You can choose to pay the interest during a forbearance period or allow the interest to accumulate. Just as deferment, if you fail to make interest payments during forbearance, it may also be capitalized, and the amount you pay in the future will be higher.
Student loan repayment should not be something that you feel you are not equipped to handle because there are many resources that are available to help you navigate the process.