Strategy 1: Income-Driven Repayment Plans
An Income-Driven Repayment Plan is a key strategy for managing your federal student loan repayment. These include plans such as:
Pay As You Earn (PAYE)
Revised Pay As You Earn (REPAYE)
Income-Based Repayment (IBR)
Income-Contingent Repayment (ICR)
Here’s what you need to know:
Your monthly payments are capped at a percentage of your discretionary income, typically between 10% and 20%.
Depending on the specific plan, the repayment term can be extended to 20 or 25 years.
The federal government forgives the remaining loan balance at the end of the term.
To stay in these plans, you must recertify your income annually to maintain your IDR plan. Failure to complete the annual student loan recertification could put you back on a standard plan, possibly leading to a higher monthly payment.
Although IDR plans can significantly lower your monthly payments, they often extend the repayment duration, which could result in paying more interest over the life of the loan.
New Repayment Plan Coming
Come next year, Federal Student Aid is introducing a new income-based repayment plan tailored specifically to benefit borrowers. With this change, undergraduates can anticipate their payment obligations to shrink to just 5% of any income exceeding roughly $33,000 annually, a significant dip from the existing 10%.
This plan also encompasses a safety net for borrowers, assuring that the government will forgive any residual interest if your payments don’t adequately cover the monthly interest.
Moreover, any outstanding loans are set for forgiveness after a period of 20 years or even as soon as 10 years under specific conditions.
Related: How to Change Student Loan Repayment Plan
Strategy 2: Loan Consolidation
Consolidating your federal loans is another useful strategy. Here’s what it entails:
Extended repayment terms can make your monthly payment more manageable, but you might pay more interest over time. Also, it’s important to mention this strategy is exclusively available to federal student loan borrowers.
Double consolidation may be a lifesaver if you’re struggling with the loans you borrowed for your child’s education. This option is especially helpful when you “can’t pay Parent PLUS Loans,” even after switching to an Income-Contingent Repayment (ICR) plan.
It opens the door to other income-driven repayment plans like IBR or REPAYE, potentially providing you with lower payments. An added bonus: this strategy could put you on track for Public Service Loan Forgiveness.
Strategy 3: Deferment or Forbearance
When faced with financial hardships, consider deferment or forbearance as temporary relief options for your federal loans. Here’s what you need to know:
Both options suspend or reduce your monthly loan payments for a specified period.
Deferment could be more advantageous as interest doesn’t accrue on subsidized loans during this period.
Conversely, interest continues to accumulate during forbearance, which may increase your total loan amount.
To use these strategies, contact your loan servicer and discuss the best option for your circumstances. Remember, these are temporary solutions and may extend the life of your loan.