Student loan repayment has resumed after a temporary hiatus due to the pandemic. But did you know that even though your first payment isn’t due until October, your interest has already started accruing?
Now that we’ve taken a closer look at student loans and the way that interest compounds on them, we’ll dive into repayment options. First and foremost: do it as quickly and as efficiently as possible! Hopefully after reading Student Loans Part 1, I’ve convinced you of the importance of paying these off before the interest becomes a nightmare.
There are two main categories that we’ll focus on today: Forgiveness and Repayment. Although President Biden fought for forgiveness, his grand plan was ultimately shut down. Borrowers now need to look for their best option to move forward.
Forgiveness
If you’re working in a certain industry, you may be eligible for loan forgiveness. Some of the eligible industries include:
- Public Service
- Non-Profit
- Teachers
- Military
Take a look at https://studentaid.gov/ to see if you qualify. Loan forgiveness could mean the end of some or all of your debt!
There are also forgiveness programs in the event of disability or death.
Repayment
If forgiveness is not in your future, that means you’ll have to figure out how to repay the loans so that you don’t default on them. As we know from previous posts, defaulting on any loan will negatively impact your credit score and make future purchases harder and more expensive.
I’d encourage you to start by figuring out how much debt you have, how much you can afford to pay each month, and what your 5-year plans are. I will list options for those of you in over your head with debt, those of you struggling to meet payments, and those of you that are able to meet the payments, or that find yourself in a position to pay them off more quickly.
Income-Driven Plans
Under a standard repayment plan, borrowers will take a principal loan amount for 10 years. Payments are fixed, which means they will be the same amount each month, and interest will start accruing as soon as the loan is given to you.
However, many borrowers graduate school just to realize that they are still starting in an entry level position and need real-life experience before they can move into a higher-paying position. If this sounds like you, consider looking into an income-driven repayment plan. These plans take your annual income and work your payments around them to make repayment affordable. Under most of these loans, your payments will not go above a certain percentage of your income. You will need to report your income each year to continue to qualify.
Consolidating/Refinancing
Another great option for borrowers is to refinance their student loans. If you’ve taken a look at how your loans are set up once you graduate, you might notice that even though you’re making one payment, you’re actually paying on multiple individual loans. These loans can have vastly different interest rates. One option is to consolidate these loans into one big loan. This way, you have one interest rate and one loan to repay. For borrowers that struggle to remember payment deadlines, this can be a great option!
Refinancing is similar; however, this option can change how much you pay, your interest rate, AND your loan servicer. Borrowers that applied by themselves or with a coborrower years ago may have had little to no credit, thus getting higher interest rates from their loan servicers. If you have a high interest rate, look into loan servicers such as Sofi or Earnest, two very reputable refinance companies. These companies can help lower your monthly payments and save you thousands!
Refinancing does come with drawbacks, though. Let’s say you have 5 individual loans that are $10,000 each. Three of them have 6% interest rates, but two of them have 10% interest rates. It might sound like a great idea to refinance if they offer you an 8% interest rate, but in the long run you’ll actually be paying more. Likewise, if you take that $50,000 that you should have paid off in 10 years, but then you extend the term of the loan to 20 years, you may drop your monthly payments in half, but you’ll pay almost double the interest by the time it’s all paid off.
Use a student loan calculator to make the smartest move for you!
Employer-Sponsored Loan Payments
If you’re working a full-time job, I would highly suggest checking your benefit package to see if they offer student loan assistance. Many employers are conscious of the student loan crisis and are including these programs in their benefits package. These programs are simple – make your minimum payments and your employer will make payments directly to your loan servicer! All I had to do was sign up with my HR department and create a log-in. Now, my job pays HUNDREDS on my loans each month!
Getting Ahead of Interest
Money often requires us to be creative in order to use it to our advantage. If you’re like me and want to watch your debt disappear, you’ll have to be making more than the minimum payment each month to truly see progress. There are a few ways to do this:
- Pay extra each month
- Make minimum payments and then make one larger principal payment each month or as often as possible
Paying more on your loans each month is a great idea, as long as you specify that it goes to the principal. Some lenders (they can be sneaky!) will apply extra to your future payments. So, even though you’re paying more, you’ll notice that your next month’s bill is just lower! The extra money isn’t actually paying the principal loan off!
Some people take on another job, some ask for a raise in their current job, and some pick up extra side hustles. Whichever you choose, make sure you’re putting the extra money to good use!
Deferment and Forbearance
The very last option (in my opinion) is to look into deferment or forbearance. These are options if you simply cannot meet the minimum payments each month and need a break from your loans. I would use these only if you are in a financial crisis.
Why?
Because for the length of time that you defer loans (typically up to a year), they STILL EARN INTEREST! You won’t be paying, but your pile of debt is going to keep on growing! By the time you come out of deferment, if you were struggling before, it will be worse.
Deferment is common for borrowers that are still in school and are not working. Forbearance is common for those in financial crisis that don’t want to file bankruptcy, but simply cannot pay their loans back at that time. If you find yourself in this situation, I would suggest looking into what you can do to lower your living expenses or raise your income. Can you find a side hustle? Rent a smaller apartment? There are lots of ways if you get creative!
If you take one thing from this post, I hope it’s that you realize repayment IS possible! You will get out of debt and there are lots of ways to reduce or amend your payments.
As always, I hope this helps, and please feel free to comment questions or ask for advice!