This post is by our regular contributor, Erin.
It’s no secret young adults are struggling with crippling student loan debt. We go to college with high hopes and graduate to a rude awakening.
In 2015, the average borrower graduated with over $35,000 of student loan debt, though some struggle to make that much in one year.
Back in August, WSJ reported that nearly 7 million student loan borrowers are in default.
It’s clear that many borrowers are struggling to figure out how to make student loans more manageable. If you’re in that boat, taking the actions below will help ease the pain.
Federal Student Loans: Graduated and Extended Repayment Plans
One of the many benefits of having federal student loans over private loans is that you have a variety of repayment plans to choose from. Unfortunately, a lot of borrowers don’t take advantage of them because they aren’t aware that they exist.
Let’s start with the basics. You’re most likely under the standard repayment plan of 10 years if you have a Direct Loan.
The closest alternative to that is the Graduated Repayment Plan. It has a repayment period of 10 years and a lower monthly payment in the beginning, which increases every two years. This is a good option for graduates who need some time to build up their earnings.
A similar repayment plan is the Extended Repayment Plan, which lengthens your repayment period to 25 years. You can choose to pay a fixed or graduated amount.
You don’t have to meet any special requirements to qualify for these plans, making them easy options to switch to if you choose.
Federal Student Loans: Income-Driven Repayment Plans
That doesn’t apply to Income-Driven Repayment Plans, though. As the name suggests, your ability to qualify for these plans is usually based on your income. If your level of income pales in comparison to your minimum student loan payment, there’s a good chance you’ll qualify.
There are four plans you can apply for:
- Revised Pay As You Earn (for all borrowers with eligible student loans)
- Pay As You Earn (for newer borrowers)
- Income-Based Repayment Plan
- Income-Contingent Repayment Plan
To find out more information on each, you can click the link above which will lead you to the U.S. Department of Education website. Eligibility, repayment details, and more can be found there.
How can you apply for a different repayment plan? You can either fill out the form or talk to your student loan servicer about your options.
I also want to point you in the direction of the Repayment Estimator, found on the same website. If you log in with your FSA ID (you can recover the information if you don’t remember it), you can see which repayment plans you qualify for.
Beware of Longer Repayment Terms
Many of the Income-Driven Repayment Plans extend your repayment period to 20 or 25 years. If there’s an outstanding balance on your loan after the repayment period is over, the balance is forgiven. However, you’ll owe taxes on that amount.
Additionally, while having a longer repayment term may give you a lower monthly payment, realize it’s a trade-off: you get an affordable payment now and pay more in interest over the life of your loan.
The same applies to the Extended Repayment Plan. The more years you spend (literally) paying back your loan, the more expensive it gets. I would strongly suggest making extra payments whenever you’re able to do so, as paying off your loan early will save you money.
Forbearance and Deferment
These options are typically exclusive to federal student loan borrowers, although some private lenders offer forbearance during difficult times. When your loans enter into forbearance or deferment, no payments are required.
What’s the difference? Deferment is the better option of the two because interest doesn’t accrue on your Direct Subsidized and Federal Perkins Loans (but does on unsubsidized loans) while payments are halted. When loans are in forbearance, they continue to accrue interest.
You must request forbearance or deferment from your student loan servicer. You should be able to do that on your account online, or you can call and request it. Here are the details on who qualifies for deferment and forbearance.
Direct Consolidation Loan
If your student loans are unmanageable right now because you have multiple loans with multiple loan servicers, consolidating these loans can help. Simplifying your payments can make your life easier as you won’t have to keep track of six different due dates or payments.
The Direct Consolidation Loan is an option that’s available only for Federal student loans, but it doesn’t exactly have the same benefits as refinancing your loans. Your interest rate won’t decrease because the weighted average of the student loans you consolidate are rounded up to the nearest 1/8th of 1 percent.
You can apply for free online; the application should only take around 30 minutes to complete. There is one catch, though – in some cases, you might lose benefits that Federal student loan borrowers have access to. This usually applies to special circumstances (such as if you’re in the military), but you can always call the Loan Consolidation Information Center at 1-800-557-7392 if you have any questions.
Have Private Student Loans? Think About Refinancing
Those with private student loans are probably thinking they’re out of luck, but thankfully, that’s not true. You have a few options.
First, it’s always worth calling up your lender and asking if they can do anything for you. Perhaps they can extend your repayment period or figure out another way to provide you with a lower monthly payment.
If that doesn’t work, there are plenty of private companies willing to refinance your student loans. Those with very high interest rates tend to benefit from this the most, but if you have multiple federal and private student loans, refinancing can help simplify your payments as you can often refinance both together.
SoFi allows you to refinance both. If you have good credit, it’s worth a shot. Applying with some private lenders (like SoFi) won’t harm your credit, either, as most allow you to apply for a quote by using a soft credit pull. If you want to move forward with the loan, a hard pull will be used.
SoFi and many other online lenders offer unique benefits as well, such as unemployment protection and forbearance.
Refinancing can potentially lower your interest rate, and some private lenders will refinance your loan to a 20 year term. If you go this route, shop around for the best rates!
Stay On Top of Your Payments
As you can see, there are many ways to make your student loans more manageable, whether you have federal or private loans. No matter what, you should try and stay on top of your payments as much as possible. If you’re in danger of missing a payment because you can’t afford it, get on the phone with your servicer or lender and explain the situation to them.
They’ll be much more willing to help you now than if you’re 30 days past due (or worse). Defaulting on your student loans is the #1 thing you want to avoid.
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If you weren’t aware these options existed before, hopefully this allows you to take action on lessening your student loan burden. In the meantime, keep working on cutting expenses and trying to earn more to make room for your payments.
Did you know about all of these student loan repayment options? What do you think about refinancing student loans? Are you on a repayment plan other than the standard one?
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I never got on a payment plan other than the original one. I just buckled down and tried to pay them off as fast as possible, paying a little more each month as I could. Definitely didn’t want those student loans hanging over my head for the rest of my life.
The thing that I don’t like about extended plans and income plans is that they may make it so you don’t even cover the interest annually. This means that your debt could actually be increasing over time. I have two friends (one a family therapist and one an optometrist) where this is the case.
Wow – that default number is crazy!!! Great tips here, Erin. We haven’t dealt much with student loan debt, but I would imagine it’s just as suffocating as credit card debt.
Great overview, Erin. Student debt can be incredibly overwhelming and unfortunately not many students know all their options, before they accept the loans and afterwards. They do have some options that can at least make the payments a bit more manageable, especially when they are just starting out and their salary is likely low.
Brian @ Luke1428 Same here, Brian! However, not everyone is in such a situation to do that. My total student loan debt was much less than the average student loan debt. I can’t imagine how I would have managed if it had been higher.
Financegirl I agree, Natalie, which is why I included the “beware of longer repayment terms” section. It’s a trade-off that you have to make up for later on (if you can). There’s definitely no simple solution.
Laurie TheFrugalFarmer I know, I was disheartened to see that! It’s true that no debt is fun to deal with, but at the very least, student loan debt typically isn’t revolving like credit card debt. It’s a bit easier to see the light at the end of the tunnel in most cases.
ShannonRyan Yes, it’s a shame we’re not educated on how we can manage them beforehand (and after). That would probably make a difference!
Nice overview. The government plans are nice if you qualify, but everyone else would be much better off focusing on getting rid of their debt quickly. I think it’s worth considering variable rate loans when refinancing. While they seem to scare off some people, especially since they will be slowly going up again soon, if you try to pay it off quickly the changing rate shouldn’t be a problem.
thebrokeprof I agree, though this post was tailored more toward those who are struggling to make payments as it is. Earning more and using the extra money toward debt is a great solution if it’s available, but some don’t have that luxury. Also agreed on using variable loans as a tactic if you know you can pay your loans off within a short time period (enough to where the rates wouldn’t surpass fixed rates).
I’m currently on a graduated plan and deciding on this option was pretty much a no brainer for me. I know I definitely don’t want to spend 10 years paying back my loans and I plan to pay more than the minimum starting next year so I don’t mind the minimum payment increasing. I’ve thought about refinancing/consolidating so I need to look into that more next year. It’s nice that all of these options exist to accommodate everyone’s situation and circumstances.
Chonce Nice! I’m with you on not wanting to take more than 10 years (or even 10) to pay back my loans. The Graduated option is definitely good to look at if you need a few years to get settled or have other debt to pay off.
Erin @ Journey to Saving Chonce Looking into loan consolidation/refinance is on my to do list for 2016. It looks like it could be a good way to save some $ on interest allowing for more saving/investing in the short-term.