One of the biggest perks of federal student loans is the options for repayment. The vast majority of borrowers can find a repayment plan that suits their needs with just a bit of research.
Traditionally, borrowers get lower payments by stretching out their repayment length. A 10-year loan has higher monthly payments than a 25-year loan, if the amount borrowed and interest rate are the same.
Federal student loans have repayment extension options, but they also have repayment plans unique to student loans.
First: A Word of Caution
Don’t fall into the trap of deferments and forbearances. Delaying making any payment will just allow interest to accumulate, and your student loan problem will become a bigger one. Deferments and forbearances should be a last resort used only after you have explored every other available option.
The best way to lower your federal student loan payments.
The easiest way to save a bundle each month on your student loans is to sign up for an income-based repayment plan.
The federal government (and therefore all of the federal servicers) offers several plans that base your monthly payments on your income. They are IBR (Income-Based Repayment), PAYE (Pay As You Earn), REPAYE (Revised Pay As You Earn), and ICR (Income Contingent Repayment). While these four all sound the same there are some major differences between REPAYE, PAYE, IBR, and ICR.
Income-Based Repayment (IBR): Under IBR, borrowers pay 15% of their discretionary income towards student loans.
Pay As You Earn (PAYE): This is one of the best income-based plans, but not all borrowers qualify. Under PAYE, borrowers pay 10% of their discretionary income, but this plan is only available to people who borrowed their first loan after October of 2007.
Revised Pay As You Earn (REPAYE): This plan was created to help the borrowers who don’t qualify for PAYE. It is more strict than IBR and PAYE when it comes to spousal income, but it has special terms for borrowers who have loans that generate more interest than their monthly payments.
Income Contingent Repayment (ICR): This plan comes into play for certain federal loans that are not eligible for IBR or PAYE. If you run into this issue, consider federal consolidation because it may qualify you for IBR or PAYE.
Another option that many borrowers choose to enroll in is the extended repayment plan. For student loan forgiveness reasons, signing up for IBR is usually a better option than the extended repayment plan.
The standard repayment plan is the 10-year plan. Of all the federal repayment plans, this one has the most aggressive repayment schedule. The good part about this plan is that you pay the least in interest, but your monthly payments will be high. If you haven’t changed your federal repayment plan, any change will likely result in lower payments.
Lowering your interest rate
The best way to save money, in the long run, is to lower your interest rate. Unfortunately, there is not really a good way of doing this. As of right now, an act of Congress is required to adjust interest rates.
The only other way to change your interest rates is to refinance your federal loans with a private lender. This is a major risk because federal loans have many special protections not offered by federal loans, and once your loan becomes a private loan, there is no way of undoing it.
However, if you are certain you are willing to forgo the federal benefits in order to secure a lower interest rate, some private lenders offer significantly lower rates.
What if you can’t afford your student loan bills?
Odds are that if you explore the various plans offered by the federal government, you can find a way to lessen the strain on your budget.
The important thing is to focus not just on the next month or the next year, but to put together a plan that eliminates the debt as quickly as possible. For some, this will be aggressive repayment for others it may involve some sort of student loan forgiveness.