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 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.
Student Loan Repayment Options
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.
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.
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 can save 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 what you need to know about various student 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 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 may also be able to 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-driven repayment.
2. Student Loan Forgiveness
Student loan forgiveness is exactly what it sounds like—it erases some of your student loan debt. 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 non-profit or public service organizations may be eligible for certain federal student loan forgiveness programs.
Some types of 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 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 page here 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 graduated and income-driven repayment plans. A graduated repayment plan, for example, 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-driven 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 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. If your balance is high, your lower, income-adjusted monthly payments may not even be covering the interest that accompanies the principal (the set amount of money you’re given when you take out the loan). So rather than shrinking, your student loan balances could be growing over time as unpaid interest accumulates.
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-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.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION. 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.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
External Websites: 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.
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.