How to Pay Off Your Student Loans

Students graduating from college today are more burdened by student loan debt than ever.  In fact, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year!  So, how do you manage this debt and pay it off in the most efficient manner possible?  We'll get to that, but first, let's look at the current statistics*:

  • $1.26 trillion in total U.S. student loan debt
  • 43.3 million Americans with student loan debt
  • Average monthly student loan payment (for borrower aged 20 to 30 years): $351
  • Median monthly student loan payment (for borrower aged 20 to 30 years): $203
  • Student loan delinquency rate of 11.6%

Now that you understand that you are not alone, let's dig into some basics and your options to rid yourself of this burden in the smartest way possible.

New Grad? Welcome to the Real World (and your Grace Period)

After you graduate, you have a lot on your plate -- from deciding where to live to finding a job.  Fortunately, repaying your student loans can wait, for awhile.  That's because, thanks to a grace period built into most student loans, you'll likely have between 6-9 months before you're required to start repaying your loans.  You have some breathing room, but this time will go quickly so use it wisely!

Options, Options, and More Options (for Repayment)

The Federal government is not usually known for its simplicity.  In this case though, it's a good thing because they have created several flexible options to help debt-strapped students manage this important financial responsibility which we will detail below: (Please note that these are options for Federal student loans.  If you have private student loans, make sure you check with your lender to see if they offer any alternative payment options.)

"Basic" Repayment Options

Standard Repayment Plan: This is the default repayment plan that everyone starts with. The details are simple: You'll make equal monthly payments for 10 years.  If you can afford the payments, you'll pay off your loan faster and pay less interest over the life of the loan than any other available payment option.

Graduated Repayment Plan: With a graduated plan, the term is still 10 years but your payments start out low in the early years of the loan and gradually increase every two years (even if your income does not). This plan is tailored to individuals with relatively low current incomes (e.g., recent college graduates) who expect their incomes to increase in the future. However, you'll ultimately pay more for your loan than you would under the standard plan, because more interest accumulates in the early years of the plan when your outstanding loan balance is higher.

Extended Repayment Plan: With an extended plan, you extend the time you have to repay your loan, usually from 12 to 30 years, depending on the loan amount.  While this option allows for more manageable monthly payments than the standard plan, it will increase the amount of interest you pay over the life of the loan. The plan defaults to equal, monthly payments but some lenders will allow you to combine the extended term of this plan with the graduated repayment schedule of the Graduated Repayment Plan.

"Income-Driven" Repayment Options

Income-Based Repayment: With an income-based repayment plan, your monthly loan payment is capped between 10-15% of your monthly discretionary income and the term of your loan is increased to 20-25 years.  As with all income-driven repayment plans, your remaining loan balance will be forgiven at the end of the loan term (see below for possible tax consequences of forgiveness).  This may be a good option if you have substantial debt in relation to your income.

Pay As You Earn:  Although difficult to qualify for, with a PAYE repayment plan will cap your monthly payment at 10% of your monthly discretionary income and the term of your loan is increased to 20 years.  This will usually result in a lower monthly payment than the above income-based repayment plan.

Revised Pay As You Earn: The REPAYE option caps your monthly payment at 10% of your monthly discretionary income and the term of your loan is increased to 20 years if you have undergraduate student loans and 25 years if you have graduate student loans.  Married couples beware: Unlike other income-driven plans that base your payment on your income alone if you and your spouse file separately, the REPAYE option will use your household's combined income to determine your payment, regardless of how you file your taxes.

Income-Contingent Repayment: While the ICR plan is the only plan available to borrowers with Parent PLUS loans, it's also the least generous.  The ICR plan caps your monthly payment at 20% of your monthly discretionary income (vs. 10-15% for the other plans) and the term of your loan is increased to 25 years.  With that said, the IRC plan may be a good option for those who cannot afford the standard repayment plan but can afford to pay more than they would on the other income-driven repayment plans.

Loan Consolidation

Loan consolidation is technically not a repayment option, but it does overlap. With loan consolidation, you combine several student loans into one loan, sometimes at a lower interest rate. Thus, you can write one check each month. You need to apply for loan consolidation, and different lenders have different rules about which loans qualify for consolidation. However, with most loan consolidations, you can choose an extended repayment and/or a graduated repayment plan in addition to a standard repayment plan.

What If I Can't Make My Payment?

There may be periods of time when making your student loan payment becomes difficult or impossible.  As we stated before, 11.6% of student loan borrowers are currently classified as "delinquent" meaning that they are either late or have actually missed a payment.  So, you are not alone and there are options.  If you are in this category, be proactive and call your lender to see if you are eligible for any of the following options:

Deferment: With a deferment, your lender grants you a temporary reprieve from repaying your student loan based on a specific condition, such as unemployment, temporary disability, military service, or a return to graduate school on a full-time basis. For federal loans, the federal government pays the interest that accrues during the deferment period, so your loan balance won't increase. A deferment usually lasts six months, and you are limited to the number of deferments you can have on any single loan.

Forbearance: With a forbearance, your lender allows you to reduce or stop your loan payments for a certain period of time, most commonly for "economic hardship."  It is important to remember that interest on the loan will continue to accrue during forbearance.  Like a deferment, a forbearance usually lasts six months, and the total number allowed over the life of the loan is limited.

Cancellation: With a cancellation, your loan is permanently forgiven.  Cancellations are granted very rarely, usually in situations involving the death or permanent total disability of the borrower, or if the borrower takes a job teaching needy populations in certain geographic areas. Note: Typically, student loans can't be discharged in bankruptcy.

Keep Calm and Pay On (Wisely!)

Hopefully this has provided some guidance on your options to pay off your student loans in the most efficient way possible.  And remember to stay organized and document appropriately so you can stay on top of your deadlines and your payments.

If you have any questions, please contact your lender directly or visit studentloans.gov for more information.   If you would like me to review your situation and provide personalized recommendations, please email me at reed@latitudeplanning.com or call our office at (480)219-0050 to schedule an in-person or virtual meeting.

 

*Data from newyorkfed.org and clevelandfed.org