Editor's Note: Since the writing of this article, President Biden signed the debt ceiling bill on June 4, canceling the federal student loan payment pause as of Aug 30, or “60 days after June 30.” Later this month, the Supreme Court will decide whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. Loan payments are expected to resume in October.
Choosing a Student Loan Repayment Option
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 a student loan repayment plan that works for you before making you make a single payment.
If you’re graduated, working, and already making payments, it can be 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 repayment 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 private student loans or older federal student loans may have variable rates. If the rate is variable, be sure to note that as well.
Different Student Loan Repayment Options
Once you understand your student loans, it’s time to think about your repayment options. The effortless choice is to do nothing and just pay your bills as they come.
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, this is formally called the Standard Repayment Plan, and it typically means paying a fixed amount every month for up to 10 years.
There’s no “standard repayment plan” for private student loans; the interest rate may vary based on market factors, and your repayment term might be shorter or longer.
The federal government also offers graduated and extended repayment plans for borrowers. A graduated repayment plan means that the payment starts smaller and grows over time, while the extended repayment plan stretches repayment over a period of up to 25 years and payments may be either fixed or graduated.
There’s nothing wrong with opting for the Standard Repayment Plan — except that for some borrowers, it’s not the most cost-effective choice. Some borrowers may be able to find a more competitive interest rate by refinancing their loans through private lenders.
Others may be eligible for special federal programs that can reduce the amount owed monthly based on financial circumstances, and in some cases, forgive balances if you meet certain requirements.
Here’s an overview of repayment options that may help if you are choosing a repayment plan:
1. Student Loan Consolidation
Federal student loan consolidation allows you to combine multiple federal student loans into a single new loan. You can’t consolidate private student loans using this 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, rounded up to the nearest eighth of a percent. 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’ll also have the option to select 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-driven repayment.
2. Student Loan Forgiveness
Some federal student loans, and Direct Consolidation Loans, are eligible for modified payment plans that forgive outstanding student loan balances.
Health care professionals, teachers, military service members, and those employed full-time by qualifying nonprofit or public service organizations may be eligible for certain federal student loan forgiveness programs.
Some types of student loan forgiveness aren’t completely free, however. Federal student loan balances forgiven under income-driven repayment plans may be considered income by the IRS, meaning that you might need to pay taxes on that amount.
Those taxes 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 (PSLF) program. After 10 years of payments on a qualified income-driven repayment plan, those who have worked for qualified employers, such as the government or some nonprofit agencies, can apply for forgiveness of all of their remaining federal student loan balances.
That forgiveness is not considered taxable income.
The Federal Student Aid website has additional information on which federal student loans qualify for which types of forgiveness, cancellation, and/or discharge.
3. Income-Based Repayment
If the payments under the Standard Repayment Plan seem too daunting, federal student loans offer a variety of income based repayment plans, which tie the amount you pay to the discretionary income you earn.
These income-driven repayment plans come in a variety of flavors and configurations, but an important takeaway is that, in some cases, you may end up paying more over the life of the loan than you would have on the Standard Repayment Plan. That’s because, with low monthly payments that stretch out over more years, you could be paying more in interest over time.
Fortunately, new federal regulations will curtail interest accrual in many situations. For instance, if your balance is high, your lower, income-adjusted monthly payments may not cover the interest that accompanies the principal (the set amount of money you’re given when you take out the loan). So rather than shrinking, student loan balances used to grow over time as unpaid interest accumulated.
However, beginning in July 2023, this excess interest will no longer accrue, saving borrowers money. Another 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-driven 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 aren’t paid off after 20 to 25 years of consistent, on-time payments. However, again, 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, depending on the repayment plan you qualify for.
4. Student Loan 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 (among other financial factors that vary by lender).
For potential borrowers with 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, however, is that once you refinance a federal student loan into a private loan, you can’t undo that transaction and later consolidate back into a federal Direct Consolidation Loan.
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.
Further, refinancing federal student loans with a private lender renders them ineligible for important borrower benefits and protections, like income-driven repayment and deferment.
Can You Change Your Student Loan Repayment Plan?
If you have federal student loans, it is possible to change your repayment plan at any time, without any fees. You’ll have the option to choose from any of the federal repayment plan options, including income-driven repayment plans.
There is less flexibility to change the terms of a private student loan. Some private lenders may offer alternative payment plans for borrowers. Check with your lender directly to see what options may be available to you.
SoFi Student Loan Refinancing
Refinancing is another avenue that can result in a new repayment plan. An important consideration, refinancing federal student loans will remove them from any federal programs or protections, so this won’t be the right choice for everyone.
If you’re considering refinancing, take a look at SoFi. Potential borrowers can find out what rates they pre-qualify for in just a few minutes and there are no fees, including origination fees or application fees.
The Takeaway
Federal student loan borrowers have the ability to change their repayment plan at any time, without being charged any fees. And new federal regulations that will curtail interest make the plans a better deal for borrowers. Changing your repayment plan is a bit more challenging for private student loans, though some private lenders may offer alternative options for borrowers. Refinancing is another option that can allow borrowers to adjust their repayment terms.
SoFi offers refinancing loans that are free of any fees and potential borrowers can apply entirely online.
FAQ
What student loan repayment options are available to me?
Borrowers with federal student loans can choose from any of the federal repayment plans, including the standard 10-year repayment plan, or income-driven repayment options. For private student loans, repayment options will be determined by the lender.
What is a standard repayment plan for student loans?
The standard repayment plan for federal student loans is fixed monthly payments over a period of 10 years. For consolidation loans, repayment may extend up to 30 years.
How long is a typical student loan repayment?
The typical student loan repayment period may vary from individual to individual. The standard repayment plan for federal loans is 10 years, but income-driven repayment plans or Direct Consolidation loans may have a longer term.
The repayment terms for private student loans vary by lender.
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SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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