If you're reading this, your college career is probably coming to an end — and student loan payments are just around the corner. Understanding your options for repayment can be pretty overwhelming, especially when you're not even sure who you're supposed to be making payments to.
We've been there. It's not fun, but your student loans also don't have to be a cause for panic. In the next five minutes, we're going to help you become an expert on everything from loan servicers to refinancing. Armed with a little bit of information, you'll know what makes the most sense for you.
Just keep on reading.
How do you pay student loans?
Let's start at the beginning. You might think that you'll be paying your student loans back to the same place where you borrowed the money. But when it comes to federal student loans, that's not the case.
When you sent in your FAFSA application, you were asking the federal government (specifically, the U.S. Department of Education) to loan you money to pay for college or graduate school. Before they loaned you the money, you (and probably a cosigner, like your parents) signed a promissory note agreeing to pay the money back, with interest.
If you received subsidized loans, the interest won't start accruing until after you graduate. If you received unsubsidized loans, interest began building as soon as the funds were disbursed. That means that your loan balance is already getting bigger before you've left school.
Once you graduate, leave school, or drop below half-time enrollment, most loans include a six-month grace period during which interest likely accrues, but you are not yet required to make payments.
When then grace period is up, it's time to get acquainted with your loan servicer.
The 411 on loan servicers
Although you agreed to pay back the U.S. Department of Education, they're not who you'll be dealing with as you begin making payments. The Department contracts with several loan servicing companies whose job is to manage repayment of the loans.
This is what you can expect from a loan servicer:
- They'll collect and track your monthly student loan payments and provide information through an online portal.
- They'll offer information and guidance on changing your repayment plan, if needed.
- They'll assess your eligibility for student loan forgiveness programs.
- They'll assist you with applying for deferment or forbearance if you need it.
Unfortunately, loan servicers don't have a great reputation for customer service, so you may have to be diligent about reaching out if you have questions or concerns.
How exactly do you get in touch with your loan servicer? Or even find out who they are?
You can find your loan servicer by going to the National Student Loan Data System. You'll need your Federal Student Aid (FSA) ID number to access your information. If you have no idea what (or where) that is, you're not alone. You received it when you first filled out the FAFSA, so it may be in an old email. You can also request a new one online.
Once you're into the system, click on Financial Aid Review to find out what types of loans you have and who services them.
Visiting your loan servicer's website should provide you information about how to contact them and give you access to various forms and articles about the repayment process.
How to choose a repayment plan
If you don't choose a specific repayment plan, you'll be assigned the default plan — a 10-year standard repayment plan with fixed payments. On this plan, the amount you pay will be the same in month 1 and in month 75.
However, you can change your repayment plan anytime. And there are a number of options to choose from, so let's get acquainted with the various plans.
If you have a graduated repayment plan, your term will still be 10 years, but your monthly payment amount will start off lower and increase every two years over the course of the term. The idea behind this payment plan is that you pay less when you're just getting started, but as your income (hopefully) increases, so do your payment amounts.
Most borrowers will end up paying more over the life of the loan on this plan than on the standard plan.
An extended plan can be either fixed or graduated, but your repayment term is extended from 10 to 25 years. That decreases the amount of each monthly payment, but it also increases the amount you'll pay over the life of the loan because you're making interest payments for longer.
Direct Loan and FFEL borrowers must have more than $30,000 in outstanding loans in those programs to be eligible for an extended repayment plan.
Income-driven repayment plans
Income-driven plans are just what they sound like. They're plans where the repayment amount is determined by your discretionary income. The idea behind an income-driven plan is that you can continue making payments on your student loans without keeping you from affording room and board.
Because the payments amounts are specific to your financial situation, you have to submit documentation every year—of your current annual income and family size. The federal government then calculates your discretionary income using federal poverty guidelines and sets your monthly payment at 10-20% of that amount.
Part of what allows the federal government to offer reduced payments is the extension of the repayment term. Income-driven repayment plans are 20 or 25 years long, and any remaining debt is forgiven after the end of the term. However, depending on tax policy at the time, you may have to pay income tax on the forgiven debt amount.
If you have a federal loan, you can enroll in an income-driven repayment plan, but your particular situation will determine the right one for you.
- Pay as you earn repayment (PAYE) plan: PAYE will set your payment amount at 10% of your discretionary income with a 20-year repayment period. To qualify for PAYE, you must have no student loans prior to October 2007 and have received a disbursement after October 2011. Your debt must also represent a significant portion of your annual income (a.k.a, a financial hardship).
- Income-based repayment (IBR) plan: An IBR plan will set your payment at 10% of your discretionary income with a 20-year repayment term if you have no student loans prior to July 2014. Otherwise, your amount will be set at 15% with a 25-year repayment term. You'll have to show financial hardship to qualify.
- Revised pay as you earn (REPAYE) plan: REPAYE sets your payment amount at 10% of your discretionary income with a 20-year (for undergrad) or 25-year (for grad school) repayment term. You do not have to show financial hardship, but your payments could be higher than the standard 10-year repayment amount.
- Income-contingent repayment (ICR) plan: An ICR plan sets your payment amount at 20% of your discretionary income or what your payments would be on a fixed 12-year term, whichever is lower. Your repayment period is 25 years, and you don't have to show financial hardship.
See also: Comparing Income-Driven Repayment Plans
An important point to remember with any income-driven plan is that, while your monthly payments may be lower, you will pay more over the life of the loan than you would with the standard repayment plan.
Student loan forgiveness
If you've heard people talking about student loan forgiveness, you've probably thought it sounded like a pretty great deal. And it is, but it's also limited to very specific situations. So don't expect that your loans will be forgiven unless you've done the careful research to determine that you qualify for a forgiveness program and have taken any necessary steps to enroll.
Here are a few of the most well-known forgiveness programs.
- Public Service Loan Forgiveness (PSLF): The grandmama of all loan forgiveness programs, PSLF provides forgiveness for borrowers that work for a qualifying employer (like a government organization or a nonprofit) and make 120 full payments on an income-driven repayment plan. It's available only for Direct Loans.
- Teacher Loan Forgiveness Program: Teachers agreeing to serve approved low-income communities for five years can have a portion of their loans forgiven.
- Students to Service Program: Medical and dental students in their final year of school can apply to get up to $120,000 of their student loans repaid by committing to three years of work at an approved site in an area with a shortage of healthcare professionals.
You can research all your forgiveness options in our Ultimate Guide to Student Loan Forgiveness.
Consolidating your federal student loans
Many borrowers have more than one loan, sometimes being serviced by different lenders, with different interest rates and different monthly payment dates. Consolidating your loans with the federal government reduces your administrative hassle and the possibility of missing payments, but it won't necessarily lower your total monthly payments or the amount you pay over the life of the loan.
When you consolidate your federal loans (private loans aren't eligible), the government turns them into a single Direct Consolidation Loan. The interest on this new loan is calculated by taking the weighted average of the interest rates on your existing loans and then rounding up to the nearest one-eighth of 1%.
You may be able to reduce your monthly payments if you extend your repayment term when you consolidate, but you will also increase the amount you pay over the life of the loan.
Consolidating with the federal government allows you to maintain eligibility for federal programs like income-driven repayment and most loan forgiveness programs, but if you've already been making payments toward a loan forgiveness program like PSLF, you'll have to start over when you consolidate.
Refinancing your student loans
With the exception of a federal student loan forgiveness program, none of the repayment options that we've discussed so far reduce the amount you pay over the life of your loan. In fact, many of them increase your total dollars out of pocket since you're paying the same interest rate but for longer.
Refinancing your student loans can reduce your monthly payment and the amount you pay over the life of the loan. This is especially true if you have student loans through private lenders.
How? Well, when you refinance, you're actually applying for a brand new loan with a brand new lender and — you guessed it — a brand new interest rate. Your new lender pays out the remainder of your loan balance(s), and you begin making payments to your new lender.
If you have multiple loans, you can refinance them all together — including federal and private loans — into a single new loan. Because of the reduced interest rates, borrowers who refinance average monthly savings of $253 and overall savings of more than $16,000.
Refinancing with a private lender is a great option for many borrowers, but think carefully if you're planning to rely on a forgiveness program or if you anticipate needing to apply for forbearance or deferment to stop making payments. Those federal benefits are not available with most private lenders.
Do yourself self a favor in both the short-term and the long-term. See how much you would save by refinancing your student loans.