While student loan borrowers have reaped the benefits of a federal student loan payment pause for the past three-and-a-half years, that forbearance period is coming to an end this October. That means borrowers are on the hook to once again make loan payments.
If you anticipate being in a financial pickle with these new loan payments coming due, below are some things pros say to consider now.
Income-driven repayment plans
You might be enrolled in a certain repayment plan, like the standard repayment plan with fixed monthly payments on education loans for up to 10 years. But “there are other repayment plans available that may be more affordable,” says Carlos Rodriguez, director of financial planning at Edelman Financial Engines.
Indeed, if you think you’ll have trouble affording monthly student loan payments, LendingTree student loan repayment expert Michael Kitchen says: “Definitely consider joining an income-driven repayment plan (IDR) if you’re not already on one. An IDR caps the amount you owe each month at a set percentage of your disposable income. And while these plans usually lengthen the term of your loan, whatever you still owe after that term is up will be forgiven,” says Kitchen.
IDR plans are intended to lower a borrower’s monthly payments by taking into account their income and family size. The IDR plans include:
- The SAVE plan The new SAVE plan, which stands for “Saving on a Valuable Education,” replaces the REPAYE (Revised Pay As You Earn) plan previously designed to assist borrowers with payment management. Like the previous plan, this new income-driven repayment plan calculates payments based on a borrower’s income and family size, not their loan balance. “This could significantly decrease your monthly payments and the time you will need to continue paying — and speed up the time frame payments will need to be paid for forgiveness, along with other benefits as well. I suggest you inquire to see if this will work for you and apply as soon as possible so you are all set before the payments are scheduled to restart,” says Lawrence Sprung, certified financial planner and author of “Financial Planning Made Personal.”
- The Pay As You Earn (PAYE) Repayment plan Borrower’s generally pay 10% of their discretionary income, but never more than the 10-year standard repayment plan amount.
- The Income-Based Repayment (IBR) plan An IBR plan payment is generally 10% of your discretionary income if you’re a new borrower on or after July 1, 2014, or generally 15% of your discretionary income if you’re not a new borrower on or after July 1, 2014.
- The Income-Contingent Repayment (ICR) plan Payments under the ICR plan are the lesser of either 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income. For more detail on all of these plans, visit the StudentAid.gov site.
Student loan forgiveness
Public Service Loan Forgiveness (PSLF) plans can greatly benefit government and not-for-profit employees. Qualifying employees who make 120 qualifying payments through an IDR plan may be able to get their entire remaining balance of loans forgiven.
Similarly, Teacher Loan Forgiveness plans offer up to $17,500 off for full-time teachers who complete five consecutive years of teaching in certain schools. To learn more about PSLF opportunities, visit StudentAid.gov’s PSLF page.
Loan consolidation
“Consolidation is another option to consider for federal loans, which is slightly different from refinancing,” says Alyssa Schaefer, chief experience officer and general manager at Laurel Road, a digital banking platform and brand of KeyBank.
Consolidating, or combining one or more federal loans into a new loan not only simplifies payments, but it can also lower monthly payments and help borrowers gain access to forgiveness programs. Consolidating loans can sometimes lower a monthly payment by providing access to additional income-driven repayment plans or by extending the term of a loan.
Unfortunately, consolidating loans can also mean a lengthier loan term and paying more interest if you have any outstanding interest on the loans you consolidate. Some borrowers also lose certain benefits when consolidating, like rate discounts, principal rebates and loan cancellation benefits that may be associated with their current loan.
Forbearance
Student loan forbearance allows borrowers to temporarily stop making payments, but in the process, progress is not made towards paying back the loan. That means interest will still accrue during forbearance and therefore it should only be used as a last resort.
Employer assistance
You may have student loan repayment benefits through your employer that are worth exploring, such as employers helping you repay loans. “They can help make debt payoff manageable,” says Vance Rusley, a financial professional at Empower.
Tax-free benefits under an educational assistance program are limited to $5,250 per employee annually. Some employers that offer this perk include Google, Hulu, Live Nation, Penguin Random House, SoFi and Staples.
Refinancing
For those with private loans or if you don’t qualify for PSLF or IDR programs on federal loans, refinancing may be an option. “Refinancing can help borrowers potentially get lower interest rates, especially with a strong credit score,” says Schaefer.
That said, while refinancing student loans can sometimes yield a lower interest rate, quicker pay off and the ability to transfer parent loans to a child, it’s also important to consider the downsides involved. Refinancing a student loan eliminates eligibility for income-driven repayment, loan forgiveness programs and federal deferment or forbearance. (See some of the best student loan refinance rates here.)
“Another thing to keep in mind is if you prefer fixed or variable terms on your loan. A fixed term means the interest rate will remain the same throughout the entire duration of the loan and variable terms mean the interest rate is subject to change,” says Schaefer.
Get help if you need it
Rusley says you may want to work with a financial professional. American Consumer Credit Counseling (ACCC), a non-profit credit counseling agency, assists with loan consolidation, cancellation, deferment, forbearance and more. The Institute of Student Loan Advisors (TISLA) offers free loan forgiveness, default, repayment plan and servicer dispute resources. Additionally, the National Foundation for Credit Counseling (NFCC) offers assistance with repayment options and debt payoff plans.
Bottom line: “There are many options available and often depend on factors like income or credit score. There’s no one-size-fits-all solution for student loan relief, and the best option depends on an individual borrower’s unique circumstances, financial priorities and long-term goals,” says Rodriguez.
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