If
you have college or graduate school student loans, you may be wondering – what
is the best student loan repayment plan for me?
The
right repayment plan for you will depend on your income, credit history and
many other factors such as your ability to support higher monthly repayments.
This article looks at how to pick the best student loan repayment plan for you.
Federal Student Loan
Income Driven Repayment Plans
If
you have a federal student loan, your monthly repayments may depend on your
discretionary income, which is defined as the amount by which your adjusted
gross income exceeds the poverty line.
The
most common are:
·
Income Based: Pay 10-15% of your
discretionary income over a 25-year term.
·
Pay as You Earn: Pay 10% of your
discretionary income over a 20-year term.
·
Income Contingent: Pay the lesser of two
options, being 20% of your income over a 25-year term, or a fixed amount over a
12-year term.
Another advantage of income
driven repayment plans is that once you finish the stipulated repayment term, all
remaining student debt is forgiven.
Prepayment on Federal
Student Loans
If
you have sufficient income, you may be able to repay your student loans early.
This gives you the benefit of paying less over the life of your student loans,
as less interest will accrue. For instance, if you have a $200 per month loan
repayment, but you pay $250 instead, the extra $50 can go towards reducing the
principal of the loan, minimizing future interest.
As
best practice, make sure you communicate in writing with your lender about any
prepayment to be sure that it goes towards paying off the loan principal, and
not towards your next loan payment.
Reducing Federal
Student Loan Interest Rates
Looking
for lower interest rates on student loans can be a good strategy, but there are
several important factors to consider. For example, the Standard Repayment Plan
for federal student loans provides the shortest repayment term, however,
repayments start at a fixed amount of at least $50 per month.
For federal student loan repayment plans,
generally if you make higher repayments each month (i.e. prepay), less total
interest will accrue, potentially resulting in significant savings over the
life of the loan.
Student Loan
Deferment
Deferment
of a student loan means that you are given extra time before you start making
repayments, for example during the first year after graduation while you search
for full-time employment.
Other
reasons for deferment might include illness, further education, major injuries,
or unemployment. Keep in mind that interest on the student loan continues to
accumulate during deferment, making your total overall repayments more costly
(except in the case of certain federal loans such as Perkins Loans and Federal
Subsidized Loans).
Deferment
may be beneficial if your income grows substantially within a few years and
repayment is difficult in the short term. However in most cases, deferment
results in an increased total debt burden if interest accrues during this
period.
While
almost all student
loans in India can potentially be refinanced, it’s important to be aware
that refinancing your federal student loans may result in the loss of certain
federal protections and benefits.
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