Borrowers have a long list of options for federal student loan repayment.
Having plenty of plans to choose from is a good thing. However, it can make it challenging to find the best plan. As a result, many borrowers choose the plan that will result in the lowest monthly payment or the plan that pays off their debt the quickest.
Sherpa Tip: This article jumps into some advanced considerations for student loan repayment plan selection.
If you are new to federal student loan repayment, it might be best to start with a quick refresher on repayment plan basics and the pros and cons of each plan.
The Department of Education’s Loan Simulator can also help you attach specific numbers to the repayment plan options.
Think About Your Financial Discipline
Some people are naturally responsible with their money. They have strong impulse control and are not prone to making money mistakes. These people will choose the option that works long-term and stick to it.
For others, managing money is more of a challenge. Extra money sitting in a bank account burns a hole in their pocket. You only live once, so why obsess about the future?
When you pick a repayment plan and strategy to manage your debt, it is crucial to consider your financial discipline. What works for one borrower may not work for another borrower — even if their income and expenses are identical.
The most important thing is that you don’t lie to yourself.
When picking a federal repayment plan, the plan with the lowest monthly payment has plenty of advantages. Borrowers can use the extra money to pay down high-interest debt, save for retirement, or get ready to buy a house.
However, for some borrowers, a lower payment just means more money gets spent on unnecessary purchases. If saving or eliminating other debts is going to be a challenge, picking a repayment plan with a higher monthly payment might make sense. It may help force you into paying off your debt sooner and saving some money on interest.
Thoughts on Student Loan Forgiveness
I’ve spoken with borrowers who are 100% certain that their federal loans will eventually be forgiven. Others believe it will never happen, and it is a waste of time to chase it.
Personally, I think forgiveness is unlikely in the near future, but it is a possibility that I hope becomes a reality.
The important detail is that you think about how you feel about forgiveness.
If you don’t think forgiveness will happen, it could make sense to pursue an aggressive repayment plan with higher monthly payments so that you can save money on interest. Some borrowers in this category may even consider refinancing their student loans.
Others have high hopes for federal student loan forgiveness. They may expect to qualify for Public Service Loan Forgiveness, or they think that the federal government will erase the debt of all borrowers. The people in this category should stick with the income-driven plans that offer low monthly payments.
Because the future is unknown, we can’t know for certain which approach will work the best. People chasing forgiveness have to accept that they might end up spending more on interest. The people who want to eliminate their debt as quickly as possible may miss out on forgiveness.
Some borrowers have stable jobs. They may also have valuable skillsets. If they lose their job, finding a new position with comparable income shouldn’t be hard.
On the other end of the spectrum, job security is a concern for some borrowers. Likewise, finding a similar income if the job is lost may also be a struggle.
Those who feel very secure in their job stability and ability to find work may opt for more aggressive repayment strategies. They can focus on battling interest.
If a consistent income for the foreseeable future is a concern, choosing a less aggressive repayment plan often makes sense. Borrowers with job stability concerns should build up emergency funds, keep the door open to student loan forgiveness, and accept that this approach might result in spending more money on interest.
Student Loans on Credit Reports
When you pick a federal student loan repayment plan, you also choose the number that appears on your credit report.
If you pick a repayment plan with a low monthly payment, your servicer will report your low monthly payment to the credit bureaus. This lower number can improve your Debt-to-Income ratio and make it easier to qualify for a mortgage.
Some borrowers may choose to repay their student loans aggressively. However, by selecting the plan with the lowest monthly payment and paying extra, these borrowers can accomplish their student loan goals without hurting future credit applications.
I often hear from borrowers considering giving up on federal student loan forgiveness and refinancing their loans. Likewise, I also hear from borrowers content with the standard repayment plan who wonder if they should switch to an income-driven plan.
It’s impossible to answer these questions completely. Every borrower has different goals, tendencies, and concerns.
When picking a repayment plan and strategy, borrowers should consider their options carefully. Refinancing your loans to an interest rate below 2% might sound good, but it doesn’t make sense if the federal government charges 0% interest on federal loans.
Each option opens some doors but closes others. The job of a responsible borrower is to carefully consider which repayment plan and strategy keeps the important doors open.
If you have strong feelings about forgiveness, concerns about job security, or worry about your financial discipline, these factors should absolutely influence the repayment decisions you make.