How to Pay Back Your Student Loans

Paying back student loans has become a challenge for more and more Americans each year.

The cost of college has increased more than 135%, or about 2.3 times, between 1963 and 2021. Many rely on loans to bridge the gap between financial aid, scholarships, and out-of-pocket costs. As a result, student loan debt has become one of the largest forms of consumer debt in the U.S., exceeding $1.6 trillion nationally.

This debt can lead to significant financial strain, particularly for recent graduates entering the workforce with relatively modest starting salaries.

Properly understanding loan repayment options, such as different repayment plans, forgiveness programs, and strategies to pay off loans faster, empowers borrowers to make informed decisions that align with their financial goals. By staying proactive, borrowers can better manage their debt, reduce the overall cost of their loans, and mitigate the long-term financial challenges associated with student loan repayment.

Understanding Your Student Loans

Student loans fall into two categories: federal and private. These student loans come with different repayment options and terms so the best way to pay off your loan will depend on the type you received. Below is an overview of some of the key traits associated with federal and private student loans.

Federal Student Loans

The U.S. government provides federal student loans through the Department of Education.

These loans generally offer more favorable terms compared to private loans. Interest rates are fixed and set by Congress, typically lower than private loans.

There are several types of federal loans, including Direct Subsidized Loans, Direct Unsubsidized Loans, and PLUS Loans. Subsidized loans do not accrue interest while the borrower is in school, whereas unsubsidized loans do.

Federal loans often come with benefits like income-driven repayment plans, loan forgiveness options, and deferment or forbearance during financial hardship.

Private Student Loans

Private student loans are offered by banks, credit unions, and other private lenders.

Interest rates can be fixed or variable, and are often determined by the borrower’s credit score and market conditions, making them potentially higher than federal rates.

Private loans typically have fewer repayment options and lack federal benefits like income-driven plans or forgiveness programs. While some private lenders may offer grace periods, they tend to be less generous or flexible compared to federal loans. Additionally, private loans may accrue interest while the borrower is still in school.

Creating a repayment plan

Without a structured plan, it’s easy to miss payments, which can result in late fees, increased interest, and even damage to a borrower’s credit score.

Borrowers should understand how much is owed and when payments are due. This way they can allocate their income more effectively, ensuring they can cover loan payments and other essential expenses without falling behind.

Creating a personalized student loan repayment plan involves several key steps:

1. Assess Your Loans: Gather details about all your student loans, including their balances, interest rates, and repayment terms. Knowing whether they are federal or private is essential as different options are available.
2. Evaluate Your Budget: Create a detailed budget that includes all your income and expenses. Determine how much you can afford to pay monthly toward your student loans without sacrificing essential needs.
3. Use Loan Calculators: Utilize online loan calculators to project different scenarios based on repayment plans, interest rates, and loan terms. This helps you estimate monthly payments and the total cost of your loans over time.
4. Set Financial Goals: Consider your broader financial goals, such as saving for emergencies, retirement, or buying a home.
5. Make Adjustments as Needed: As your financial situation changes, reassess your repayment plan to ensure it still aligns with your income, expenses, and goals. Make extra payments to reduce interest and pay off your loans faster if possible.

» Learn More: How to Pay Back Your Student Loans

Federal Student Loan repayment options

Federal student loan borrowers have access to a variety of repayment plans designed to meet different financial needs and life circumstances. These plans range from standard options that offer fixed payments over a set period to more flexible, income-driven plans that adjust based on earnings.

Choosing the right plan depends on a borrower’s income, loan balance, and long-term financial goals.

Standard Repayment Plan

The Standard Repayment Plan is the default option for federal student loan borrowers. It provides fixed monthly payments over a 10-year period. This plan ensures borrowers repay their loans quickly, minimizing the interest paid over time. However, the monthly payments may be relatively high for borrowers with large balances. It’s ideal for those who can afford higher monthly payments and want to get rid of their debt as quickly as possible.

Graduated Repayment Plan

Under the Graduated Repayment Plan, payments start lower and gradually increase every two years over the course of 10 years. This plan is tailored to borrowers who expect their income to grow over time, such as those early in their careers. While it helps make initial payments more manageable, borrowers will pay more in interest than under the Standard Plan due to the slower reduction of the loan principal in the early years.

Extended Repayment Plan

The Extended Repayment Plan allows borrowers to extend their repayment period to up to 25 years, either with fixed or graduated payments. This plan reduces monthly payments by stretching them over a longer period, which can be helpful for borrowers with large loan balances. However, borrowers will pay more in interest over the life of the loan. This plan is generally available to borrowers with over $30,000 in federal student loan debt.

Income-Driven Repayment (IDR) Plans

There are several Income-Driven Repayment (IDR) options, each designed to tie monthly payments to the borrower’s discretionary income. These plans include Saving on Valuable Education (SAVE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Monthly payments under these plans are typically set at 10% to 20% of discretionary income and are recalculated each year based on income and family size. After 20 or 25 years of qualifying payments (depending on the plan), any remaining balance is forgiven, though the forgiven amount may be taxable. IDR plans are beneficial for borrowers with lower or fluctuating incomes.

Private Student Loan Repayment Options

Private lenders have much more flexibility in their repayment options than federal loans, so it is crucial to contact your lender to understand the paths available. Lenders may offer forbearance or deferment in financial hardship, temporary unemployment, or other emergencies, though these options are more limited than federal loan protections.

Most private lenders offer a few standard repayment options:

Immediate Repayment

• Overview: Borrowers start repaying both principal and interest immediately after the loan is disbursed.
• Pros: Paying off the loan faster reduces the overall interest paid.
• Cons: Monthly payments start immediately, which can be challenging for students still in school.

Interest-Only Repayment

• Overview: Borrowers pay only the interest while in school and begin repaying the principal and remaining interest after graduation or leaving school.
• Pros: Keeps the loan balance from growing while in school.
• Cons: Does not reduce the principal during school, which can result in higher payments later.

Fixed Payments While in School

• Overview: Borrowers make small, fixed payments (e.g., $25) each month while still in school. Full payments on principal and interest begin after graduation.
• Pros: Helps reduce interest accrual during school, keeping loan costs in check.
• Cons: Payments are minimal and won’t reduce the principal while still enrolled.

Deferred Repayment

• Overview: Borrowers do not make any payments while in school and typically receive a grace period of six to nine months after graduation before repayment begins.
• Pros: No immediate financial pressure while in school.
• Cons: Interest accrues throughout the deferment period, increasing the total cost of the loan.

Graduated Repayment

• Overview: Borrowers start with lower payments that gradually increase over time. This option may be offered after graduation.
• Pros: Helpful for graduates with lower initial earnings but expectations of future income growth.
• Cons: More interest may accrue over the life of the loan compared to fixed payment plans.

Extended Repayment

• Overview: Some lenders offer extended repayment terms of 15, 20, or even 25 years, lowering monthly payments by spreading them over a longer period.
• Pros: Lower monthly payments, making loans more manageable for borrowers with limited income.
• Cons: Higher interest costs over the life of the loan due to the longer repayment period.

Making Payments

Making timely student loan payments is crucial for maintaining good credit and avoiding penalties or late fees. Here are some practical tips for staying on top of your student loan payments:

Set Up Automatic Payments (Autopay)

Most lenders offer automatic payment options that deduct your monthly payment directly from your bank account on the due date. Autopay ensures that you never miss a payment, reducing the risk of late fees and potential credit damage. Many lenders offer interest rate discounts (typically 0.25%) for enrolling in autopay, which can save you money over time. Make sure to always have sufficient funds in your account to avoid overdraft fees or missed payments.

Use Online Payment Portals

Most loan servicers provide online portals where you can make payments, view your loan balance, check due dates, and manage your account. Making payments online is quick and convenient, allowing you to control when payments are made and track payment history in real time. Schedule your payments a few days before the due date to account for any potential delays in processing.

Create Calendar Reminders

Use digital calendar tools or reminder apps to set alerts for your payment due dates. You can also set reminders for a few days before the due date as a buffer. Reminders help you stay on track and prevent missed payments in case of distractions or busy schedules.

Pay More Than the Minimum When Possible

Pay more than the minimum required amount each month when you can. Any extra payment you make goes directly toward the principal (after interest is paid), reducing the overall balance faster. Paying extra reduces the total interest you will pay over the life of the loan and helps you pay off the loan more quickly. Specify with your lender that the extra amount should be applied to the principal, not future payments.

What Are the Consequences of Missed Payments?

If you make a late payment on a federal student loan, it will likely be considered delinquent. If the due date is approaching and you’re concerned you won’t make the payment on time, contact your loan service provider as soon as possible. With consistent delinquency status, your loan may default.

Student loans never disappear. There’s no statute of limitations, and student loans are rarely discharged, even in bankruptcy. With few exceptions, your student loans will follow you until you pay them off.

Defaulting on federal student loans has severe penalties. Delinquency status begins the day after your first missed payment. If, after 90 days, you fail to repay the amount or fail to take other actions indicating your intent to pay, your delinquency gets reported to major credit bureaus. If this continues, you risk defaulting, which has serious consequences.

The government can garnish (withhold) up to 15% of your wages and Social Security benefits. Your credit score will take a serious hit, which has a ripple effect on your ability to make big purchases, such as a home, car, or good credit card. You also risk being taken to court by your loan holder, resulting in court and attorney’s fees in addition to collection fees.

Late or missed payments show up on your credit report and harm your score. If you cannot afford your payments, it is crucial to contact your loan servicer and review your options. It’s never a good idea to remain silent and not pay.

When Do Student Loan Payments Start?

For recent graduates, payments typically start after a six-month grace period. This grace period still applies if you drop out or slip below half-time status. Its purpose is to give you time to find a job, select a repayment plan, and begin earning income before paying your bills.

There are benefits to beginning your repayments before your grace period expires. Unsubsidized loans accrue interest while you’re in school and during your grace period. You can also consolidate your student loans during your grace period. This simplifies the repayment process by grouping your student loans into one payment, which goes to one lender.

Don’t be too hasty, though. Borrowers who consolidate early surrender their grace period, and repayment will begin when the Direct Consolidation Loan is processed. You can ask to delay the processing until you are closer to the end of your grace period.

Private lenders offer lower interest rates to those with high credit scores. If you have good credit and are looking to lower your interest rates on medical school loans, for example, working with a private lender may be a good option.

Preparing for Student Loans Payments

There are several types of student loan repayment plans. Some are based on discretionary income, which is the difference between the borrower’s annual income and a percentage of the poverty guideline based on family size and state of residence. These loan programs, commonly referred to as income-based repayment – usually run 20-25 years and may include loan forgiveness.

Other repayment plans start with low payments that increase as your income increases.

Regardless of which plan you choose, make sure you know who your loan-holder is, where to send your payments, and how much you have to pay.

If you have questions about discharging loans or consequences for missing payments, get answers to those concerns as soon as possible to avoid falling behind. Your loan servicer and the Federal Student Aid office’s website are good starting points for assistance.

Some of the best way to prepare and make student loan payments include:

• Prioritizing paying off your loans.
• Using your grace period, if applicable, to research repayment options.
• Creating a budget around your student loans.
• Reaching out to your loan servicer. This is the individual assigned to handle your loan by the Federal Student Aid office, whose website can determine who your servicer is.
• Setting up automatic payments to avoid late fees.
• Avoiding student loan default at all costs.

Dealing with Hardships

For student loan borrowers facing financial difficulties, several options are available to help ease the burden, especially with federal student loans. Understanding these options can help borrowers avoid default and manage their loans more effectively.

Deferment

Deferment allows borrowers to temporarily pause their loan payments for a set period, often due to specific circumstances like returning to school, unemployment, or economic hardship. Federal loan borrowers may qualify for up to three years of deferment in certain cases. During deferment, interest does not accrue on subsidized loans or Perkins Loans, making it a valuable option for borrowers who want to avoid growing loan balances. However, interest continues to accrue on unsubsidized loans and PLUS loans, which could increase the total amount owed after the deferment period ends.

Forbearance

Forbearance is another option to pause or reduce payments, though it is generally less favorable than deferment. Federal borrowers may qualify for general forbearance due to financial struggles, illness, or other personal circumstances. Mandatory forbearance is also available for certain situations, such as medical residency or participation in AmeriCorps. Unlike deferment, all types of federal loans accrue interest during forbearance, which can significantly increase the loan balance over time. Forbearance is typically limited to a year at a time, with a cumulative limit of 3 years for general forbearance.

Loan Forgiveness Programs

Federal student loan borrowers have access to several loan forgiveness programs designed to alleviate their debt burden under specific conditions. These programs cater to various professions and financial situations, allowing borrowers to have their remaining loan balances forgiven after meeting certain criteria.

Public Service Loan Forgiveness (PSLF)

The Public Service Loan Forgiveness (PSLF) program is one of the most well-known forgiveness options. It is available to borrowers who work full-time in qualifying public service jobs, such as government organizations or eligible non-profits. To qualify, borrowers must make 120 qualifying monthly payments (equivalent to 10 years) under an income-driven repayment plan while working for a qualifying employer. Once the payments are completed, the remaining loan balance is forgiven, tax-free. PSLF is particularly appealing to professionals in education, healthcare, public safety, and other public service fields.

Teacher Loan Forgiveness

The Teacher Loan Forgiveness program provides financial help for teachers who work in low-income schools or educational service agencies. Eligible teachers who work full-time for five consecutive years in qualifying schools can have up to $17,500 of their Direct or Stafford Loans forgiven. The amount forgiven depends on the subject taught and whether the teacher is highly qualified. For instance, math, science, and special education teachers are eligible for the maximum forgiveness, while others may qualify for up to $5,000. Teachers who qualify for both Teacher Loan Forgiveness and PSLF must choose one, as the two programs cannot be combined.

Other Profession-Specific Forgiveness Programs

There are additional federal forgiveness programs for professionals in specific fields. For example, healthcare workers in underserved areas may qualify for forgiveness through the National Health Service Corps (NHSC) Loan Repayment Program, while attorneys working in public service roles can benefit from state and federal loan repayment assistance programs (LRAPs). Each program has its own eligibility requirements and service obligations, making it essential for borrowers to research their specific field’s opportunities.

Strategies for Paying Off Loans Faster

Expediting student loan repayment can save borrowers significant amounts in interest and help them achieve financial freedom sooner. Here are some effective strategies to pay off student loans faster:

1. Make Extra Payments

One of the simplest ways to accelerate repayment is by making extra payments on your student loans. By paying more than the minimum required each month, borrowers can reduce the principal balance faster, which in turn reduces the interest that accrues over time. To maximize the impact of extra payments:

• Specify principal payments: Ensure that any additional amount you pay is applied directly to the principal rather than to future payments.
• Pay biweekly: Splitting your monthly payment in half and paying it every two weeks results in an extra full payment each year, helping to reduce your loan balance more quickly.

2. Apply Windfalls to Loans

Using unexpected financial windfalls, such as tax refunds, bonuses, or gifts, to pay down your loans can significantly shorten your repayment period. Instead of using these extra funds for discretionary spending, applying them to your student loan principal can make a big difference. Even a few large lump-sum payments can dramatically reduce the total amount of interest paid and shorten the loan’s life.

3. Refinance to a Lower Interest Rate

Refinancing student loans can help borrowers secure a lower interest rate, resulting in lower monthly payments and less interest paid over time. Borrowers with strong credit scores and stable incomes are most likely to benefit from refinancing. The key advantage of refinancing is that it can free up more of your budget for making extra payments on the principal. However, be cautious: refinancing federal loans with a private lender eliminates federal protections such as income-driven repayment plans and loan forgiveness options.

4. Take Advantage of Employer Repayment Assistance

Some employers offer student loan repayment assistance as part of their benefits package. Employer contributions are typically made directly toward your loan balance and can significantly speed up repayment. Under the CARES Act, employer contributions toward student loans (up to $5,250 annually) are tax-free through 2025, which makes this option even more attractive. If your employer offers such a benefit, maximize it by combining it with your own extra payments to further reduce your loan balance.

Navigating Your Repayment Journey

If you ever struggle with student loans, remember you always have options. Don’t wait until you’ve missed payments. Taking proactive steps to manage student loans is essential for long-term financial success. If you’re overwhelmed by your student debt or want to ensure you’re on the best possible track, now is the time to take action.

Your loan servicer is your primary resource for understanding your loans, exploring repayment options, and resolving any issues. Don’t hesitate to ask questions about your loan terms, repayment plans, or interest rates. Your servicer can help you adjust your repayment strategy to fit your current financial situation, whether that means switching to an income-driven repayment plan, applying for deferment or forbearance, or refinancing your loans. Regular communication with your servicer keeps you informed and prevents misunderstandings about your loans.

The last thing you should remember is that you can handle this. Stay ahead, communicate with your loan servicer, and create a plan that works for you and your budget. Once you have the necessary tools and information, student loan repayment won’t feel so overwhelming.