Is there a cheaper way to pay off student loans? – Forbes advisor

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After you graduate from college and enjoy your six-month grace period, it’s time to repay your student loans.

The standard repayment plan is the standard repayment plan that every federal student loan borrower starts after leaving school. While it is the default option, it is not the only student loan repayment option. With some other plans, you may be able to make lower monthly payments, extend the payback period, or both.

What is the standard repayment plan?

The standard amortization plan has fixed monthly payments that you pay for 10 years (or up to 30 years if you have a direct consolidation loan). You pay the same monthly payment throughout the repayment period, set to ensure that you will pay off your loan with interest within ten years.

When you start paying off your federal loans, you will be automatically enrolled in the standard repayment plan, unless you decide otherwise to switch to another plan, such as income-oriented repayment plansYou pay 120 payments – or monthly payments for 10 years.

While your payments are as low as $ 50 per month, they are not guaranteed to be that low; your monthly costs are determined by the amount of your loan. That means your monthly payments may be higher compared to other repayment plans.

Which loans are eligible for the standard repayment plan?

Direct and federal family education loans are eligible, including:

Only federal student loans are eligible for the standard repayment plan. Private Student Loans from banks and other lenders are not eligible.

How the standard repayment plan works

Let’s take a look at an example to demonstrate how the standard amortization plan works: Suppose you have $ 26,946 in student loans. When you graduate, your 3.9% interest starts. For the standard amortization plan, your monthly payments are approximately $ 272 and will be paid in 10 years. The total amount you pay is $ 32,585, including $ 5,639 in interest.

While other plans may have lower monthly payments, the standard repayment plan allows you to pay off your loans as quickly as possible. If you’re not sure which plan is best for you, you can use that provided by the federal government Loan Simulator to get an idea of ​​how much you are paying.

Standard repayment plan benefits

Benefits of the standard repayment plan include:

  • Faster repayment. You pay off your loan in 10 years, so that you can spend your money sooner on other things, such as buying a house, saving for retirement or expanding your family.
  • Lower total interest payments. Since you will pay off your loan in 10 years, you will pay less interest on your loans in total compared to other repayment plans. The alternative options spread the repayment of your loan over a longer period, so that you pay more interest during the term of your loan.

Standard repayment plan drawbacks

Disadvantages of the standard repayment plan include:

  • Higher monthly payments. Since you are on track to pay off your loans earlier, you have higher monthly payments. This may seem daunting at first, especially early in your career when you are not earning as much as someone who is further along or making more money. If you can’t afford the monthly payments, you may want to check out other repayment plans.

Alternatives to standard repayment plan

Even though the standard repayment plan is an option, it is not your only repayment choice. You may be eligible for other loan repayment plans, including:

  • Stepped redemption. Payments start low and then increase over time – roughly every two years. This strategy assumes that you will earn more income over time and you can afford higher payments, but it also ensures that you pay off your loan within 10 years (or between 10 and 30 years for consolidated loans ).
  • Extended refund. This is available to borrowers with $ 30,000 or more in direct loans. You can have fixed or staged payments and your loans will be paid off within 25 years.
  • Repayment based on income (IBR) You make payments that are 10% or 15% of your discretionary income – based on when you first received your loans – but you never pay more than what you would pay under the standard repayment plan. Your payments are updated every year based on your income and family size, even if they haven’t changed. After 20 or 25 years, the remaining balance on your student loan will be waived.
  • Income-dependent repayment (ICR) Your payments are the lowest of: 20% of your spendable income or the amount you would pay under a 12-year fixed-payment repayment plan. Your payments are adjusted annually to take into account your family and income changes, and you should update your information even if no changes have occurred. After 25 years, your remaining balance will be forgiven.
  • Income Sensitive Refund (ISR). This is only available to FFEL Program Loan borrowers. Your payments are based on your annual income, but you are guaranteed to pay off your loan within 15 years.
  • Pay what you earn (PAYE) Your monthly payments amount to 10% of your disposable income and you pay no more than the standard repayment plan. Your remaining loan balance will be waived after 20 years of repayment.
  • Revised Pay As You Earn (REPAYE) Direct loan borrowers pay up to 10% of discretionary income with payments recalculated annually based on your income and family size. After 20 or 25 years, the remaining balance of your loans will be waived.

Many repayment plans require annual updates to your information to accommodate any changes. If you have a raise this year or have an afterthought that makes more money, your payments could go up. If you’ve recently lost your job and aren’t making money, your payments can drop to just $ 0.

Refinance Your Federal Student Loans

If you have a mix of federal and private student loans or you don’t like the choices of your federal payment plan, you can refinance your student loans

Refinancing is when you combine all of your student loans into one loan, replacing all your payments with one streamlined monthly payment. But refinancing is only done through private student loan providers; the federal government has no refinancing options (only consolidationYou lose your ability to interrupt payments through delay or forbearance, changing your repayment plan to one that is friendly to your income or that you qualify for Public Service Loan Forgiveness (PSLF)

While you may lose your federal protection, refinancing may be a good idea. For example, if you have great credit and solid income to pay off your student loans earlier than you would through federal repayment options, refinancing can work for you. But if you don’t have great credit or a solid income, you may want to explore other options.

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