Want to pay off student loans? Make sure you understand the advantages and disadvantages for each repayment plan.
Here’s what you need to know.
1. Student Loan Consolidation
Federal student loan consolidation is the process of combining your federal student loans into a new federal student loan called a Direct Consolidation Loan. Only federal student loans (not private student loans) are eligible for Direct Loan Consolidation. When you consolidate student loans, your new interest rate is equal to a weighted average of your current interest rates, rounded up to the nearest 1/8%.
Advantages: Student loan consolidation is helps organize your federal student loans into a single monthly payment.
Disadvantages: Student loan consolidation doesn’t save you money or lower your monthly payment.
2. Income-Driven Repayment
For federal student loans, consider an income-driven repayment plan such as IBR, PAYE or REPAYE. Your payment is based on your discretionary income, family size and other factors, and is typically lower than the standard repayment plan. After a certain period of time (such as 20 or 25 years, for example), your federal student loans (not private student loans) can be forgiven.
Advantages: You can lower your monthly payment if you face temporary hardship based on your income.
Disadvantages: Interest accrues even though you have lower payments. You don’t receive a lower interest or save money. You owe income taxes on the amount forgiven.
3. Student loan forgiveness
Public Service Loan Forgiveness is the federal government’s primary program that will forgive all your federal student loans. You have to meet all the requirements, which include, among others, making 120 monthly payments while you work full-time for a qualified public service or non-profit employer. You can get started by completing an Employer Certification Form with the U.S. Department of Education. Don’t fall for companies that promise to forgive all your student loans – they don’t exist.
Advantages: You can receive full forgiveness of your federal student loans.
Disadvantages: The program requires that you makes 120 monthly payments (10 years) while you work in public service. The requirements can be tricky.
4. Refinance student loans:
Student loan refinancing rates are incredibly cheap right now and start at 1.99%. Student loan refinancing is the fastest way to pay off student loan debt. When you refinance, you combine your existing federal student loans, private student loans or both into a new student loan with a lower interest rate. You can choose new loan terms, including variable or fixed rate and a loan repayment term from 5 to 20 years. You can also apply with a cosigner to help you get approved and get a lower interest rate. Lenders prefer borrowers with at least a 650 credit score, stable and recurring income, and a low debt-to-income ratio.
Advantages: You can get a lower interest rate, save money and pay off student loans faster. You simplify all your student loans into one loan and one payment.
Disadvantages: If you refinance federal loans, you won’t have access to income-driven repayment plans. (However, most lenders allow you to pause payments if you face financial hardship or lose your job).
This student loan refinancing calculator shows how much you save when you refinance student loans.