Student loans are an indispensable component of higher education. But don’t despair — there are various repayment plans and forgiveness programs that may help ease their burden.
Before borrowing money for their future plans, students should be sure they fully comprehend all available loan options and consider all relevant considerations before taking out loans. Here are a few key points they should keep in mind when borrowing:
Repayment Options
Before beginning repayment on any federal student loans or private lender debts, make sure you understand all available repayment plans. Federal student loans offer several flexible plans while private lenders may also have their own options available to them.
Federal loan servicers offer various payment plans, such as standard 10-year payments that set monthly payments to ensure your debt will be cleared off (with interest) within 10 years. Graduated repayment plans start with lower initial payments that gradually increase; interest-only payments during school; deferment/forbearance programs to postpone payments as necessary.
Many borrowers opt for an income-driven repayment plan (IDR), which sets your monthly payments based on your income and family size. Some IDR plans offer forgiving any remaining debt after 20-25 years of qualifying payments; the newly introduced Saving on a Valuable Education (SAVE) Repayment Plan offers even more generous terms than traditional IDR plans – be sure to revisit all options annually when considering repayment strategies.
Forgiveness Programs
There are various loan forgiveness programs to assist borrowers with repayment, some targeting specific groups like veterinary students and military service members, while others provide more general assistance.
Income-driven repayment plans offered by the federal government allow borrowers to cap their monthly payments at a percentage of their income and provide for forgiveness after 20 or 25 years, although forgiven amounts remain taxable as ordinary income.
Deferment and forbearance offer another form of debt forgiveness, providing postponing repayment. Unfortunately, these options come with interest charges as loans continue accruing during deferment or forbearance periods, increasing your total amount owed over time.
Recently, the Department of Education unveiled time-limited changes to loan forgiveness programs that make qualifying easier. Before applying, it’s essential to understand how these plans operate as they’re only open to federal Direct or consolidated student loans managed by the ED and can only reduce payments if under 10% discretionary income payments are being made monthly. With SAVE (Student Aid Vs Repayment Efford and Equity), payment penalties for those paying less will also be eliminated and payments could potentially decrease by almost half!
Prepaying Your Loans
Many student loan servicers offer autopay, which will automatically withdraw payments from your bank account on your statement due date. This can save borrowers money as it prevents them from missing payments that could damage their credit rating; additionally, many servicers also offer quarter-point reduction in interest rate with this option.
Prior to changing your payment plan, use the Education Department’s Loan Simulator to assess its impact. A standard repayment plan that spreads equal payments over 10 years might be best. Or perhaps a pay-as-you-earn plan that extends repayment periods up to 25 years might work best.
Most IDR plans allow for part of your debt to be forgiven after 20-25 years; however, only federal loans made through the Direct Loan Program qualify and must meet strict eligibility requirements in order for you to do so.
Postponing Repayment
If you need to reduce your payments, there are various solutions available to you. Income-driven repayment plans offer one such solution by capping monthly payments at a percentage of discretionary income – there are four IDR plans: income-driven repayment, Pay As You Earn (PAYE), Revised PAYE and Saving on a Valuable Education (SAVE). Traditional repayment plans like standard and graduated plans also exist which have fixed payments over specific timeframes.
If you are experiencing financial difficulty, deferment and forbearance are two options that may help postpone repayment. While these don’t save any interest charges, they do allow for temporary stops or reductions to payments. Be mindful, though; loans that go unpaid during deferment or forbearance accrue interest that only adds more debt; furthermore if using forbearance frequently it may impede eligibility for loan forgiveness programs.
