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4 Student Loan Repayment Options—and How to Choose the Right One for You

March 22, 2018 · 5 minute read

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4 Student Loan Repayment Options—and How to Choose the Right One for You

How to Repay Your Student Loans

It’s never too early to think about student loan repayment. Whether you just started college, or you recently graduated and are still in the ‘grace period’ before repayment, strategizing now may help you find the best repayment plan before making you make a single payment.

If you’re graduated, working, and already signed on to one payment plan, it’s easy to overlook the other choices. But you can make changes to your student loan repayment plan even if you’re not in a financial crunch.

It’s also a good idea to re-evaluate your plan over time. As your financial circumstances change, the way you want to manage your student loans may shift. Before considering your options, take inventory of all your student loans. Be sure to list out the principal, the interest rate, the repayment period, and the servicer for each loan.

All federal student loans issued in recent years have fixed interest rates, but many private student loans or older federal student loans have variable rates. If the rate is variable, be sure to note that as well.

The Standard Repayment Plan for Student Loans

Once you understand your student loans, it’s time to think about your repayment options. The effortless choice, of course, is to do nothing and just pay your bills as they come. This is formally called the “standard plan.”

Simply put, it means you pay back your student loan(s) under the interest rate and terms you agreed to when you initially signed the paperwork. For federal student loans, that typically means paying a fixed amount every month for at least 10 years. For private student loans, the interest rate may vary based on market factors, and your repayment term might be shorter or longer.

There’s nothing wrong with opting for the standard plan—except that for some borrowers, it’s not the most cost-effective choice. Some borrowers can save by refinancing their loans through private borrowers. Others may be eligible for special federal programs that can reduce the amount owed based on financial circumstances, and in some cases, forgive ebt balances if you meet certain requirements. Here’s what you need to know about various tudent loan repayment options:

1. Student Loan Consolidation

Federal student loan consolidation lets you combine multiple federal student loans into a single new loan. You can’t consolidate private student loans in the federal program. When you consolidate your federal student loans into a Direct Consolidation Loan, it doesn’t necessarily reduce your overall interest rate.

Your new loan’s interest rate will be the weighted average of all the old student loans’ interest rates. This means your interest rate might actually be slightly higher than the rate you were paying before consolidation on some of your student loans.

When you consolidate, you maybe also pick a new repayment plan. The standard plan would still be available, but consolidation can also be a first step toward other plans of action, like loan forgiveness or income-based repayment. That’s because most Direct Consolidation Loans qualify for those plans, whereas federal student loans and Perkins loans can lead to losinge certain loan benefits.

2. Student Loan Forgiveness

Student loan forgiveness is exactly what it sounds like—it erases some of your student loan debt. Some federal loans, and Direct Consolidation Loans, are eligible for modified payment plans that forgive outstanding student loan balances from five to 25 years. Health care professionals, teachers, military service members, and those employed full-time by non-profit or public service organizations are all eligible candidates for student loan forgiveness programs.

Some types of forgiveness aren’t completely free, however. Balances forgiven under income-based repayment plans may be considered income by the IRS, meaning that you might need to pay tax on that amount. That tax might still be less than paying the forgiven principal amount, but it can be an unpleasant surprise at tax time if you’re not prepared.

One notable exception is the Public Service Loan Forgiveness program . After 10 years of payments on a qualified income-based repayment plan, those who have worked for qualified employers, such as the government or some non-profit agencies, can apply for forgiveness of all of their remaining federal student loan balances.

That forgiveness is not considered taxable income.

Additionally, you can see on this chart which federal student loans qualify for which types of forgiveness, cancellation, and/or discharge.

3. Income-Based Repayment

If the payments under the standard plan seem too daunting, federal student loans offer a variety of graduated and income-based repayment plans. A graduated repayment plan means that the payment starts smaller and grows over time, while income-based repayment plans tie the amount you pay to the discretionary income you earn.

These income-based repayment plans come in a variety of flavors and configurations, but an important takeaway is that, in many cases, you may end up paying more over the life of the loan than you would have on a standard repayment plan.

That’s because, with low monthly payments, you could be paying more in interest over time. If your balance is high, your monthly payments may not even be covering the high interest that accompanies it, meaning rather than shrinking, your student loans could grow over time.

The upside is that if your job situation is less defined and you know you’ll need to tap the reduced payment rates these plans provide, choosing an income-based repayment plan makes that possible. Additionally, you’re still able to qualify for some student loan forgiveness programs if the rest of your student loans that aren’t paid off by the end of consistent payments after 20 to 25 years. However, it’s worth keeping in mind that you might be on the hook to pay income taxes on the remaining loan amount that is forgiven on this plan.

4. Refinancing

Refinancing student loans through a private lender offers the opportunity to consolidate multiple student loans into a single payment and potentially decrease your interest rate. Loan repayment terms vary based on the lender, and terms and interest rates are often more favorable for those with better credit and earning potential. For borrowers with strong earning potential and an interest in saving money over the life of their student loan, refinancing can provide overall value by offering market interest rates.

One important thing to know about refinancing is that once you refinance into a private loan, you can’t undo that transaction and later consolidate back into a federal Direct Consolidation Lloan. This can be relevant for professionals in health care or education where federal student loan forgiveness plans are offered, or for those considering long-term employment in the public sector.

Which student loan repayment plan makes the most sense for you? Consider refinancing with SoFi as an option that could save you money.


SoFi does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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