There’s a lot of talk about student loans and how students borrow too much money that they struggle to pay back. While these claims have merit, one thing you don’t hear discussed as often is the different options for paying back your student loans.
When I graduated and received my notice that I needed to start paying back my student loans, I immediately knew I would need to consolidate my loans. If I wouldn’t have consolidated, my total payments each month would have been more than $400 which would be more than challenging as a new graduate. By consolidating, or combining all my loans into one big loan, I was able to lower my monthly payment significantly. The downside was that it would take me 20 years to payoff and the interest I would pay would increase significantly. But it’s what I needed to do.
Consolidation isn’t the only option though. There are other options available to students to help you afford your payments and most importantly, pay off those loans.
One of the options is the Income Based Repayment (IBR) Option. This type of repayment does require a partial financial hardship for you to qualify, which means that your total monthly payment calculated under the IBR calculation is less than the payment under the normal repayment plan. To get the IBR calculation, they take into consideration your household income, loan balances, monthly payment, state you live in, and family size. While the lower payment is definitely the main advantage, there are other options such as loan forgiveness after 25 years. But there are disadvantages. For example, if the loan is forgiven, the amount that is forgiven can be taxed as income.
Another option, which may seem similar to IBR, is the Pay as You Earn option. This type of repayment also requires a partial financial hardship. The monthly payment under the Pay as You Earn will never be greater than 10% of your discretionary income. The formula used to calculate your discretionary income is your annual income minus the poverty guidelines for your household size. Similar to IBR, your loans under Pay as You Earn are forgivable after a certain time period, in this case: 20 years. You also can get forgiveness after 10 years of public service.
Student loan payback options aren’t talked about enough. We hear all about the hardships and how people struggle to make payments. But do these people know their options? Probably not. These are just two of the various options available to student borrowers. Make sure you know your options and make a choice that works for your budget.
For even more options and explanations, visit studentaid.ed.gov.
Did you explore other payment options after you graduated?