How to Compare Your Student Loan Repayment Options
Lots of repayment options are available – the best choice for you depends on your goals.
There are a variety of ways to repay your student loans. Your optimal repayment plan will depend on the amount of debt you owe, your financial situation, and your long term goals, including plans you may have to return to school.
Federal vs. Private Loans
If you have Federal student loans, there are multiple repayment options:
- Standard repayment plan consists of 120 equal payments over the span of 10 years. Unless specified, federal borrowers are automatically placed on this plan.
- Extended repayment extends the payment term to 25 years with 300 total payments. While your monthly payments will be lower, you’ll likely pay more interest overall. Borrowers must owe at least $30k in Federal student loans to be eligible.
- Graduated Repayment starts your payments off lower and increases them every two years over a 10-year period. This is ideal if you expect to start with a lower salary that will grow over time, yet you want to pay off your loans relatively quickly.
- Income-Driven Repayment (IDR) plans are for those with modest incomes and a substantial amount of debt. Payments are set as a percentage of your discretionary income. IDR plans include Income Based Repayment, Pay As You Earn, Revised Pay As You Earn, and Income-Contingent Repayment. With all four plans, any remaining loan balance is forgiven if, at the end of the Federal repayment period, your loans aren’t fully repaid.
The Department of Education has suspended interest and monthly payments on Federal student loans through September 30, 2021.1
If you have private loans, your options are more limited:
- Immediate repayment means that principal and interest payments begin as soon as your loan is disbursed.
- Interest-only payments requires you to make interest-only payments while in school, then begin principal and interest payments once you graduate or drop below half-time enrollment.
- Fixed payments require you to pay a low fixed amount while in school, then begin making more substantial payments once you leave school or drop below half-time enrollment status.
- Full deferment requires you to pay nothing while enrolled in school and begin making interest and principal payments within a set time frame after you leave school.
Depending on your lender, you may be eligible for a deferment or forbearance period if you’re not able to keep up with your regular loan payments. This typically requires a financial hardship and it isn’t offered by every lender.
Managing Your Student Loans
You don’t need to stick with your existing loan repayment plan. Consolidation and refinancing can help you manage your loans more efficiently – and in some cases, save you thousands of dollars in interest payments.
Federal Loan Consolidation
Loan consolidation is offered by the government and is available for most types of Federal loans. If you currently have Federal loans with different loan servicers, consolidation can simplify your repayment by combining them into a single Federal Direct Consolidation loan with just one monthly bill. Your consolidated rate will be a weighted average of your previous rates, and not necessarily a lower rate. You may be able to lower your monthly payment by extending your repayment period, but you will likely pay more interest over the long run. Federal loan consolidation can also provide access to income driven repayment plans and Public Service Loan Forgiveness, but you must re-qualify for these programs each year.
Student Loan Refinancing
Both Federal and private loans may be refinanced with private lenders. Refinancing also combines your existing student loans into a single student loan, but, unlike Federal loan consolidation, you may be able to obtain a lower interest rate, which can save you a significant amount of money over the life of the loan. To qualify for the best rates, you’ll need a solid credit history and a stable income.
Student loan refinancing also offers more options for loan terms, with most lenders allowing you to repay your student loans over 5, 7, 10, 15, or 20 years. If you want to pay off your student loans as quickly as possible, you can choose a shorter repayment term, but if you’re strapped for cash, you can opt for a longer term.
Note that for those with Federal loans, refinancing doesn’t always make sense since you will lose access to certain Federal programs, including income-driven repayment plans, forbearance and deferment options, and Public Service Loan Forgiveness. So be sure to weigh your options carefully.
Consider student loan refinancing if:
- You want to lower your interest rate
- You have a strong credit score and stable income
- You want to pay off your student loans faster
- You don’t plan to use Federal income-driven repayment plans or public service loan forgiveness
Even if you’ve already consolidated Federal loans, you can still refinance. There is no limit on how often you can refinance and there are no fees and or prepayment penalties.
The Bottom Line
Taking the time to understand your student loan repayment options could save you a significant sum of money. If you have the ability to pay more than your current monthly payments, you may want to refinance to shorten the term of your loan. With the same or lower interest rate, you could save significantly on interest charges. However, if you’re struggling to make your payments, you may be able to consolidate or refinance into a longer term. Above all else, you’ll want to ensure you can comfortably make your monthly loan repayments.
1“Coronavirus and Forbearance Info for Students, Borrowers, and Parents,” U.S. Department Of Education, https://studentaid.gov/announcements-events/coronavirus, accessed March 19, 2021.