Enroll In A Graduated Repayment Plan
A Graduated Repayment Plan is perfect for someone who doesnt qualify for an income-driven repayment plan for their federal loans, but cant afford their payments under a standard 10-year term.
With a Graduated Repayment Plan, your payments start out very low, regardless of your income. Every two years, your payment increases. After 10 years of making payments, your loans are paid off.
Avoid Scams And Wasting Money
Dont use credit cards or home equity to pay off student loans.Credit cards will cost you way more in interest. If you refinance your loans using home equity and run into trouble paying your mortgage, you could lose your house. Either way, you will lose the flexible repayment options and borrower protections offered by federal student loans.
Dont go back to school just to avoid loan payments. Even during in-school deferment, your loans will accrue interest. Carefully compare the costs and benefits of more education. Unless it will increase your earnings, more debt could make your financial situation harder in the long run.
Watch out for scams.You may get letters, emails, calls, or text messages advertising loan forgiveness. Here is a list of the only federal student loan forgiveness programs available. Never share your loan or bank information, or your studentaid.gov login.
NOTE: Loan forgiveness scams often include a presidents name, like Trump Loan Forgiveness or Biden Student Loan Forgiveness. For that reason, you may want to omit presidents names when you are searching for information about loan forgiveness.
Consider Consolidating Or Refinancing Student Loans
Consolidating and refinancing offer two ways to streamline student loan repayment. With debt consolidation , you combine multiple loans together at an interest rate that reflects the average rate paid across all of your loans. This can be done with federal student loans to merge multiple loans into one.
Refinancing is a little different. Youre taking out a new loan to pay off the old loans, so you still end up with one monthly payment. But if that new loan has a lower interest rate compared to the average rate you were paying across the old loans, you could save some moneyprovided you dont extend the term. One thing to note about refinancing private student loans is that youll need good credit to qualify, which may necessitate bringing a cosigner on board.
Be very careful to avoid student loan scams, which are particularly prevalent if you try to refinance your loans or investigate loan forgiveness.
You can refinance federal and private loans together into a new private student loan, but doing so will cause you to lose certain federal loan protections on your federal loans, such as deferment and forbearance periods.
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Should You Refinance Federal Student Loans
One of the main reasons to understand which type of loans you hold is to understand what you could lose by refinancing them. When you refinance federal student loans, you give up all associated consumer protections, and theres no way to transfer your loans back to the government.
For example, if President Joe Biden ends up forgiving a certain amount in individual student loan debt, that will only apply to federal student loans. If you refinance your federal loans, you wont be eligible for loan cancelation.
Private lenders typically dont offer other types of loan forgiveness or income-driven repayment options either. Because of these tradeoffs, it may be worth skipping refinancing your federal loans and keeping them federal, even if refinancing them would lead to a much lower interest rate.
Takecontrol Of Your Loans
Now that you understand the ins and outs of your loans, lets go over some strategies for getting them paid off as quickly and smoothly as possible.
Knowwhat you owe. Make a list of your student loans. Include whether theyre private or federal, monthly payment and due date, the current and principal balances, the interest rates, and servicer. For federal loans, it will also help to know what type of loan it is and the name of your repayment plan. If youre not sure, start by checking your free credit report. You can look up your federal loans at studentaid.gov.
See if your loans fit into your budget and pay schedule.Making a budget and exploring strategies for reducing debt will help you see how your student loans fit into your finances. Request a different due date if that would make it easier for you to make your payments on time and in full.
Make sure your federal repayment plan is the best one for you. You can use the Education Departments Loan Simulator to compare plans by monthly payment, total interest, and more.
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If You Have A Plan 4 Loan And A Plan 1 Loan
You pay back 9% of your income over the Plan 1 threshold .
If your income is under the Plan 4 threshold , your repayments only go towards your Plan 1 loan.
If your income is over the Plan 4 threshold, your repayments go towards both your loans.
Example
You have a Plan 4 loan and a Plan 1 loan.
Your annual income is £28,800 and you are paid a regular monthly wage. This means that each month your income is £2,400 . This is over the Plan 4 monthly threshold of £2,083 and the Plan threshold of £1,657.
Your income is £743 over the Plan 1 threshold which is the lowest of both plans.
You will pay back £67 and repayments will go towards both plans.
Opt For A Graduated Payment Plan
If your income is low now but you expect it to increase over the next few years, a graduated repayment plan might give you the breathing room you need.
Rather than fixed payments over 25 years, this variation of the extended repayment plan starts off with monthly payments that gradually increase. Most federal loans require a payment period of just 10 years. However, if you consolidated any loans through the Department of Education, you may have 10 to 30 years to pay off the consolidated loan, depending on how much you owe.
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Deduct Interest Payments From Your Taxes
You might be able to deduct a portion of your interest payments from your topline earnings, which would reduce your income and ultimately how much you have to pay.
For individuals whose adjusted gross income is less than $70,000 , you can deduct up to $2,500 worth of interest payments, according to the IRS. Phaseouts occur for single filers who make between $70,000 and $85,000 and joint filers earning between $140,000 and $170,000. The student loan interest deduction is an above-the-line exclusion from income, so you can claim the deduction even if you dont itemize.
I Have A Huge Chunk Of Change But Not Enough To Pay Off The Loan So What Do I Do
There is no trick or shortcut to use this money to get your entire debt off the books. If you have enough money to pay off most of your student loan balance, send in the big check. It wont get rid of your loan entirely, but it will put a huge dent in what you owe. It will also mean much less interest for your lender each day. A partial payoff may not be your ideal solution, but its much better than paying exactly what your lender wants each month.
However, before making that huge payment, be sure to consider other financial goals like retirement,an emergency fund, and buying a house.
Even though most borrowers will not be able to get their debt wiped away with a partial payment, they can still make a huge dent in the interest that is working against them on a daily basis. It isnt the ultimate goal, but it is a big step forward.
Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.
Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.
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Look Into Loan Forgiveness And Repayment Assistance Programs
Student loan forgiveness and repayment assistance programs aren’t a quick fixâyou typically need to meet certain requirements, which can include waiting several years. But they can provide a long-term solution to your student loan problems while you also seek short-term relief.
There are student loan forgiveness programs available for borrowers who work in public service or as teachers, and there are federal and state-based loan repayment assistance programs that can help you if you’re a health professional, teacher, public defender, STEM worker or military service member, among other professions. Take some time to research opportunities online to see what’s available and whether you’re eligible.
Also, note that some private employers also offer student loan repayment assistance as an employee benefit. If your company doesn’t offer this, consider doing a little research to see if you can find a job with an employer that does.
My Loans Were In Default What Happens To Me
Its still not entirely clear.
An Education Department spokeswoman said the department was working to finalize plans that would help defaulted borrowers when the pause ended.Before the extension of the pause, the department said policies that were under consideration would allow such borrowers to avoid having their tax refunds or child tax credits garnished.
Loans fall into default after roughly nine months of nonpayment, though it often takes a year or more for an account to move into collections. At that point, the federal government can take your tax refund, up to 15 percent of your paycheck or part of your Social Security benefits.
Borrowers generally have a few ways to emerge from default, which they must do before they can enter an income-driven repayment plan. Paying the loans off completely is an option, but usually not feasible. Loan consolidation is another option, or, alternatively borrowers can rehabilitate their loans. That involves making nine out of 10 consecutive reasonable payments, which your loan holder determines using a formula.
Advocates for student borrowers hope that the Biden administration will provide them with a fresh start by wiping away their defaulted status and making their loans current. That would allow them to avoid the often cumbersome hurdles required to get out of default at a time when loan servicers are likely to be inundated.
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Check If You Qualify For Student Loan Forgiveness
Usually, student loan forgiveness is offered to federal loan borrowers who work as qualifying public servants, like teachers, government employees and nonprofit workers. Additionally, loan forgiveness may be on the table under unique circumstances, such as the COVID-19 pandemic, or as a result of government policy, such as the $5.8 billion discharged for borrowers with disabilities in August 2021.
Loans can also be discharged or canceled for other reasons if your school closes before or shortly after you graduate, if you or a parent borrower passes away, or after declaring bankruptcy. Other borrowers may take advantage of established programs that may forgive, cancel or discharge their debt. It’s important to remember, of course, that you’ll still need to make on-time payments on the loan until you qualify for forgiveness.
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What To Do If Youre Having Trouble Making Your Student Loan Payments
If lowering your monthly student loan payment isnt enough, and youre still struggling to make your payments, either deferment or forbearance could provide temporary relief. Youll apply for these with your loan servicer, and you may need to prove financial hardship to be eligible.
As part of a COVID-19 emergency relief measure, federal student loan payments are currently paused and no interest is accruing until Jan. 31, 2022. If you still need help with your payments after Jan. 31, heres some additional information on deferment and forbearance.
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Option : Enroll In An Income
One of the most straightforward ways to reduce your monthly payment is by signing up for an income-driven repayment plan.
There are four income-driven repayment plans, but they all have the same purpose: to allow you to continue paying back your student loans without inhibiting your ability to afford basic things like food and rent.
That means your lender needs to understand how much you spend on the non-negotiable things in your life so that they know how much you have left over .
The idea is that, while you absolutely have to pay the heat bill and the rent check, you could skip the new purse or the fancy vacation.
Of course, everyone on an income-driven repayment plan isn’t submitting their monthly budget to the Department of Education. Instead, you provide documentation of your current annual income, and the government calculates your discretionary income using federal poverty guidelines for families of your size in your geographic location.
Once they’ve calculated your discretionary income, they’ll set your monthly payment at 10-20% of that number, depending on the specific plan you’ve chosen.
What is your eligibility for an income-driven repayment plan?
If you have federal student loans, you can enroll in an income-driven repayment plan.
If you checked out NSLDS or your credit report, then you already know whether you have federal loans.
How to enroll in an income-driven repayment plan
There are two ways to apply:
The Extended Repayment Plan
The extended repayment plan extends out your standard student loan payment from 10 years to 25 years.
The extended repayment plan is available to all Federal student loan borrowers – no income limits apply to this. So, it’s always an option for borrowers.
In our example, if you were to switch to the extended repayment plan, you would lower your student loan payment to $196 per month.
You can switch to this plan simply by calling your lender.
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Apply For A Graduated Repayment Plan
If a borrower makes too much to qualify for an IDR, they still get lower initial payments with a graduated plan. There is a 10-year plan and 25-year plan.
Like IDRs, they are based on the assumption youll earn more as the years pass. Unlike IDRs, your payments automatically increase every two years even if your income doesnt or your family situation changes.
Be aware that the increases mount up. For instance, if you owe $38,000, your monthly payment would be $213 in Year 1 under the 10-year repayment plan. That would jump to $638 a month in Year 9.
Stay On Track With Income
Set a reminder to renew your paperwork. IDR plans require you to confirm your income and household size every year. To be safe, set a reminder for a month early. If you miss it, your account will revert to the Standard Plan.
Renew early if your income goes down or your household grows. Your monthly payment will be recalculated.
Beware of capitalization. Leaving certain IDR plans will cause your unpaid interest to capitalize . On the ICR plan , your unpaid interest may capitalize annually. Call your servicer to understand how this could affect you.
Lower your payment by saving for retirement. Your IDR payment is based on your adjusted gross income . Contributing to a tax-deferred retirement account, like a 401 or 403, decreases your AGI and your IDR payment too. This could increase the amount forgiven if you are pursuing loan forgiveness through PSLF or IDR. Learn more about saving for retirement.
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Refinance Your Student Loans
You can get a lower payment and lower interest rate when you refinance your student loans.
This student loan refinancing calculator shows you how much money you can save.
Student loan refinancing combines your current federal and private student loans into a new private loan. A lower interest rate will save you money each month. You can also choose a repayment period between 5 and 20 years. If you choose a longer repayment period like 20 years, you can get a lower monthly payment. That said, you may pay higher total interest if you choose a longer repayment horizon.
There are many ways to lower your monthly student loan payment. As temporary student loan relief ends, make sure you know all your options. Here are some smart ways to pay off student loans faster:
Cares Act Automatic Federal Student Loan Forbearance
If you have a student loan owned by the U.S. Department of Education, the government has granted you automatic forbearance on this loan under the Coronavirus Aid, Relief, and Economic Security Act. The forbearance was set to expire on Jan. 31, 2021, under the previous administration, then it was extended under the Biden administration until Sept. 30, 2021.
The administration extended the forbearance period again on Aug. 6, 2021, allowing loans to stay in forbearance until Jan. 31, 2022.
Between March 13, 2020, and January 31, 2022, no interest will accrue, and you don’t need to make any payments. No late fees will apply if you stop paying during this period. You’ll know you have this benefit if you see a 0% interest rate when you log in to your student loan account. On March 30, 2021, the Department of Education extended this benefit to defaulted privately held loans under the Federal Family Education Loan Program.
Under normal circumstances, you can’t make progress toward loan forgiveness during forbearance. But under the CARES Act, you can. You’ll receive credit toward income-driven repayment forgiveness or public service loan forgiveness for the payments you normally would have made during this period.
There may be tax obligations tied to any loan forgiveness.
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