Paying back student loans can seem extremely personal and overly complex. There are so many options when making student loan payments that it can be overbearing and confusing. I get mail constantly from some of the well-known debt consolidation companies promoting the current offers they have. But is consolidating student loan debt always a good decision? In this article, I'm going to work through what I consider the three main options for repaying student loans.
When faced with student loan debt, as many young people are, it can seem daunting to try and understand what the best options are, and how to go about getting rid of a large amount of student loan debt. Hoping for a presidential candidate like Bernie Sanders to be elected and forgive all student debt is not a realistic strategy. Even if Sanders is elected president, he would be faced with a massive struggle in forgiving any student loan debt, and would likely need to compromise somewhere in order to make it happen.
The main three options that I want to highlight when paying back student loans are paying them off completely in 10 years or less, paying based on an income driven repayment plan for 10 years or less, or paying based on an income driven repayment plan for 20 or 25 years. Paying off student loans in 10 years or less is likely the easiest option, and the one I would pursue in the vast majority of situations. This would simply entail staying in the standard 10 year repayment plan, switching to the 25 year (300 months) repayment plan and continuing payments at the 10 year rate, or consolidating my student loans with whoever gave me the biggest bonus and best rates.
If I felt comfortable paying my loans back at the 10 year rate, and I didn't want to deal with consolidation, or I felt strongly that some federal student loan balance will be forgiven in the near future, then I'd keep my loan repayment at the standard 10 year rate. If I had a job with an inconsistent paycheck, or was worried about making the payments at the 10 year rate, and I was confident that I could hold myself accountable for paying back the loans quickly, I could always decide to have my loans set up for the 25 year rate, and then pay an additional amount each month to equate to the 10 year repayment rate. This way, if I had a large bill, or unexpected expense, I would have the ability to pay a little less one month, and then start paying again at the 10 year rate whenever I was able to. There's no penalty for paying extra each month or paying my loans back sooner.
The last option, and the one I would do if I were able to pay comfortably back my loans in 10 years or less, is to consolidate my student loans. This would be a great option if I only have a few thousand dollars in student loans, or if I felt like I could comfortably pay my student loans off in less than 10 years. Many of the student loan consolidation companies provide sign up bonuses and much lower interest rates than what my federal loans are. Consolidation could easily save me thousands of dollars on student loans. The biggest caveat is that I would need to be absolutely certain that I will be paying my loans off as fast as possible, and I would need to be comfortable without the safety net of deferment, forbearance, or forgiveness. I don't think I will ever consolidate my student loan debt, unless my annual income increases to near the level of my current debt ($300,000). If my income gets that high, I will likely attempt to pay my entire student loan balance back in two or three years. If my income continues to increase at about 2.5% each year, then I'll just stick with the path I'm on.
What if paying back my loans at the 10 year rate isn't feasible? Since I would struggle to pay back my loans at the 10 year rate, then I would start looking into one of the avenues for student loan forgiveness. If I worked for the government, or a non-profit organization then would be able to have my student loan balance forgiven in as little as 10 years, which is the case for my wife.
In order to qualify for public service loan forgiveness (PSLF) I must:
- be employed by a U.S. federal, state, local, or tribal government or not-for-profit organization that is tax-exempt under Section 501(c)(3) of the Internal Revenue Code ;
- work full-time for that agency or organization;
- have Direct Loans (or consolidate other federal student loans into a Direct Loan);
- repay your loans under an income-driven repayment plan; and
- make 120 qualifying payments.
Each of these points are extremely important, and must be followed exactly as they are written. I would estimate that it's why there are so few people who have actually had their student loans forgiven at this point in time.
Even though I don't work for a non-profit organization, and don't plan on moving to a non-profit organization in the near future, I can still have your student loans forgiven after 20 years of payments under one of the income-driven repayment plans. If I only had undergraduate loans, I could have my student loan balance forgiven after 20 years of payments with pay-as-you-earn (PAYE), revised-pay-as-you-earn (REPAYE), or income-based-repayment (IBR). However, since I have student loans from graduate school, I can still have my student loans forgiven after 20 years of payments under PAYE and IBR, but in REPAYE, I would need to make up to 25 years of payments.
In order to determine which repayment plan would might be best for me, I played with the student loan repayment calculators over at the studentaid.gov website, and at student loan hero. The repayment estimator at studentaid.gov is great, because it brings in all of my student loans and tells me exactly which ones are eligible for student loan forgiveness, and which ones aren't. The student loan calculators at student loan hero are much more customizable though, and I've found that they're a little more realistic when estimating changes to my future income. I constantly work through different scenarios with my loans to try and better understand how my situation may change, and it's had a huge impact on my understanding of my student loans in general.
Once I have a good understanding of my student loan situation, and my personal goals, I then have a good idea of what to expect for my student loan payments by using the calculators. After playing with the repayment calculators, I am then able to make a more informed decision on which payment plan is right for me. Right now, I'm still in the PAYE plan, since my wife's loans will be forgiven before my 20 years of repayment is up, and under REPAYE, her income would count towards my student loan payments, but it's entirely possible that we employ some combination of the three strategies that I've outlined above. There are many more ways to pay back student loans than the three I've written about here, but now that I understand these three main strategies, I feel confident of my plan to free myself of my student loans.
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