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It’s no secret that Americans are facing down substantial student loan balances. What is a secret—or might as well be—are the numerous government programs designed to help.

Income-contingent repayment programs such as PAYE might just sound like another government acronym, but considering this program could lower your monthly payments, it’s worth looking into. Expecting new graduates to pay high monthly installments is a tall order, which is why plans like this exist. The government (surprisingly enough) has some options to alleviate your student loan debt burden.

What is the Pay as You Earn Plan?

The PAYE, or Pay As You Earn Plan is exactly what it sounds like; The plan bases your monthly student loan payments on your income, not your debt. PAYE is a government program geared toward aiding graduates struggling with loan payments. So, say you’re having trouble meeting your monthly payments.

With programs like PAYE, your loan payments are tailored to what you can afford. That means if you’re making $30,000 a year, payments might be limited to $100 a month, whether you owe $5,000 or $50,000 in student loans. And, under this plan, if you’ve been making qualifying monthly payments for 20 years, your outstanding debt could be forgiven.

There are other, private-lender options to lower your monthly payments, such as refinancing your loans. But before deciding if that is the right route for you, we put together this helpful guide on the PAYE plan.

How Does PAYE Work?

For those who qualify and sign on for PAYE, payments are generally around 10% of your discretionary income . If your income increases, and your monthly payments get recalculated, your payments will never exceed what you would be paying under the standard plan , as long as your income is still under the qualifying threshold.

So what’s the catch? For one thing, lower monthly payments will, of course, mean a higher accumulation of interest. And while your loan balance could be eligible to be forgiven in 20 years, that forgiveness in many circumstances is seen as income in the eyes of the IRS. So if in 20 years you still owe, say, $20,000, even if the total balance is forgiven, you might have to pay taxes on that $20,000 the same year its forgiven.

Am I Eligible for a PAYE Plan?

Not everyone is eligible for the PAYE program. First off, PAYE only works for federal direct loans. And because PAYE was created for those struggling to meet loan payments, PAYE is only available to those who can demonstrate financial hardship. This makes sense, of course, because 10% of a high discretionary income would be a high monthly payment and over the payments of a federal standard plan.

PAYE plans are given to those whose monthly payments are lower than they would be on the standard 10-year payment plan. You can use the Department of Education’s income-based loan Repayment Estimator to compare this to your payments under the standard plan.

What Are My Other Options Outside of PAYE?

If PAYE isn’t right for you, there are plenty of other options offered by the federal government or by private lenders. If you have federal loans, there are three other income-driven repayment options:

• Income-contingent repayment (ICR), which asks for generally 20% of your discretionary income. Your loans are eligible to be forgiven after 25 years. And just like the PAYE loan forgiveness option, you could be taxed on the amount that’s forgiven.

• Revised Pay As You Earn (REPAYE), which takes generally 10% of your discretionary income. There is a forgiveness option after 20 years if you’re paying off your undergrad degree, or 25 years if you’re paying off undergrad and grad school loans.

• Income-based repayment (IBR), which takes generally 10% to 15% of your discretionary income. Your loans are forgiven after 20-25 years, though you could be get taxed on the amount that’s forgiven.

To see what you would pay under the different plans, just plug your information into the Department of Education’s IBR calculator .

Those looking to lower their interest rates may also want to consider student loan refinancing, especially if you have a combination of private and federal loans. Increasingly, private lenders are offering rates lower than the federal government’s, making refinancing a popular option.

Essentially, refinancing means replacing your student loans with one, brand-new loan with a lower interest rate. If you have a good financial history and a steady income, you are an especially good candidate for loan refinancing.

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.
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.
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, 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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Along with fireworks, the flag, and a deep appreciation of cars, the college debt crisis is unfortunately about as American as apple pie. The average student borrower has about $34,000 in loans to pay off today. The student debt crisis isn’t going anywhere either.

As of March 2018, there were 44.5 million borrowers in the United States who owe over $1.3 trillion, according to the Federal Reserve . And that’s not even the scariest part. The US student loan debt is growing bigger every day as Americans are paying more on average than they did a decade ago for school.

Between 2001 and 2016, the real amount of student debt owed by households more than tripled. This scary rise of college loans has many experts saying we’re in the midst of a student debt bubble .

In 2016, an average college student with a bachelor’s degree graduated with $28,446 in debt . Students entering college now could end up paying even more by the time they graduate.

To put it into perspective, in the past 10 years, student loan debt in the US has grown by 170% . With 45% of recent graduates carrying student debt, the class of 2018 expects to retire by 72 .

Will the Growth of Student Loan Debt Slow Down?

Answer: probably not. In the past 10 years, US student loan debt grew to be worth more than car loans or credit card debt. It is the second-largest source of household debt and the only kind of personal debt that grew in the wake of the Great Recession.

As US student loan debt continues to grow, experts are saying this could be a student debt bubble, as the growth of debt looks eerily similar to the housing bubble of 2008 .

Similarly to how the housing market collapsed in 2008, many worry that as student debt increases and grows larger than what a borrower could reasonably repay, there will be an increase in defaults.

A new study found that using default rates from 1996, nearly 40% of 2004 borrowers may
default on their loans by 2023 . What does that mean for 2014 borrowers, who have taken out even bigger loans than there 2004 cohorts?

How U.S. Student Loan Debt Grew So Big

Although many in the media like to bemoan the increase of people attending colleges who are not qualified, the student debt bubble has little to do with more students enrolling in university. Only one-quarter of the aggregate increase in student loans since 1989 is attributed to students attending in college.

There are a few surprising factors that are causing the unruly rise of the college debt crisis. For one, education costs are continuing to rise – and not in line with the rest of the market. The headline consumer price index between 2016 and 2017 was 2.7%, while tuitions rose by 9% at state universities and 13% at private colleges . If the cost of higher ed continues to rise more than the cost of living, borrowers will continue to feel the pain.

In addition to rising college costs, experts say the monumental amount of debt is linked very directly to the collapse of the housing market. When the housing market crashed in 2008, parents who could borrow against the value of their homes were no longer able to do so, forcing more students to take out debt in their own names.

One economist estimated that a $1 drop in home equity loans due to a plummeting house prices leads to 40 to 60 more cents in student loans.

While it helps to know you are in good company, news of the student debt bubble might have you kvetching. The only thing worse than owing thousands of dollars of money to Uncle Sam is hearing that the millions of others in the same boat might end up tanking the US economy.

Can Refinancing Help with Student Debt?

But don’t run for the hills just yet. If you’re worried about the student debt crisis, you might want to consider refinancing. By refinancing student loans, you can consolidate existing private and federal loans into one new student loan with a lower interest rate. Not only does this mean you’ll only have one payment to worry about, it means you could pay less overall.

According to the Department of Education , interest rates on student loans can range from 3.5% to 8.5%, with most in the 5% to 7% range. Not only is that extremely high – consider the typical auto loan or mortgage rate – but if your interest rates are punishing, it only means you’ll remain in debt longer.

With borrowers paying off around four student loans on average, refinancing would also mean less paperwork each month. Between 2011 and 2016, online lenders have refinanced around $6 billion in student loans . Consolidating loans is a great way to make payments more manageable depending on what kinds of debt you have.

Researching Refinancing Options

There are a wide range of student loan refinancing options available. But it’s important to do your homework as the student debt crisis grows larger, because there are many predatory companies that might take advantage of your financial situation.

A study found that when plagued by anxiety over debt, borrowers were more likely to fall for a scam. With the US student loan debt exponentially rising, this has led to an increase in bad actors. Some estimate that there are over 130 companies that run student loan scams, which could result in even more debt in your lifetime.

But that doesn’t mean refinancing isn’t right for you. Not only could it mean consolidating all your payments into one monthly bill, but you could qualify for a lower interest rate which over your lifetime could spell big savings. It also means you’ll become debt-free sooner. Can you say score?

Although there are ways to consolidate federal loans with the government, refinancing involves a private lender. All of your student loans – both federal and private – are consolidated through refinancing. A private lender typically offers a lower interest rate, depending on a number of factors like your credit score, your payment history, and how much you still owe. This lets you pay your loans off at a more competitive rate, which can translate into thousands of dollars in savings.

When refinancing, it’s also possible to change the term length of your loan. If you’re feeling tight on cash with big monthly payouts, consider a longer term. If you’d rather get rid of your student debt as soon as possible, opt for a shorter term with larger payments.

Use a student loan calculator to see how much you can gain from refinancing. All you need to know is how much you owe and what your interest rates are across both federal and private loans. At SoFi, you can request a quote without actually committing to refinancing, which makes it easier to decide on next steps.

Refinancing with SoFi can help ensure your loans are consolidated and managed properly. Similarly to how using a Certified Public Account to file taxes can save you bundles of moolah, using a reputable lender can help you save money on your student debt. SoFi can help evaluate repayment strategies and potential forgiveness options while staying on top of pesky paperwork.

Scared of the looming student debt bubble? Consider refinancing your student debt with SoFi for one easy monthly payment and potentially thousands in savings.

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.
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.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.

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The average Class of 2016 graduate walked down the commencement aisle with $37,000 in student loan debt . We all know that higher education is expensive, but that’s a big responsibility for a 22-year-old to be saddled with as they start their career. The interest payments on a $37,000 loan alone could afford the average new grad a whole lotta revolutions through the Taco Bell drive-thru and pairs of polyester work slacks. (Or better, the ability to start saving some money!)

If you have student loans, there is a way to reduce the amount of interest you pay over the lifespan of your loan or loans; It’s called student loan refinancing. There are people who have refinanced their loans and saved tens of thousands of dollars—and it’s possible you could too.

You’ll often hear the terms student loan refinancing and student loan consolidation used interchangeably, but they’re technically different. Only student loan refinancing has the potential to reduce how much you pay in interest. If your goal is to reduce what you owe, you’ll need to learn how to refinance student loans. Because it’s important to understand which is right for your situation, let’s hash out the definitions and details of both options.

Student Loan Refinancing Breakdown

Okay, so your current loans are either obtained through the government (that’s the most common route) or a private lender, like a bank (less common). Each loan has an interest rate—likely, a fixed rate of interest—set at the time you took out that loan. (If you have loans issued before 2006, there is a possibility that rates on your loans are variable, which means the interest rate may fluctuate.)

When you refinance one or all of these student loans, you’re basically just swapping out the old loans and replacing them with a fresh, new one in hopes of getting a better rate or more favorable terms.

Quite literally, the new lender pays off your old loan(s) and provides you with a spankin’ new loan. Now, the reason it’s worth it to learn how to refinance student loans is because it can lower your interest rate or term, thereby saving you money. A better interest rate or term can either lower your monthly payments or reduce the time it takes to pay off the loan, respectively.

Getting Started With Refinancing

The first step is to explore whether refinancing is the right option for you. Refinancing has historically only been available for federal loans, but there are a handful of lenders who refinance private loans as well. This is not the case for simple loan consolidation, which can only be done with federal loans.

If you’ve got federal loans and are taking advantage of income-based repayment or the Public Service Loan Forgiveness program, it may not be worth learning how to refinance student loans; Those programs (and other benefits) won’t transfer to your new loan . If you have no plans to take advantage of any federal debt-relief program, it’s time to look into refinancing.

Local banks and credit unions often offer student loan refinancing, but online lenders like SoFi tend to offer more competitive rates. Each lender has its own criteria for determining your rate, but it’s generally based in part off credit score and income.

Student loan refinancing is generally available to folks who are in better financial situations than when they first took out loans, whether through increased salary, improved credit score, or another circumstantial shift, like marriage. Refinancing can also help if you have loans with exceptionally high interest rates.

Even a seemingly small improvement in your loan’s interest rate could save you a lotta scratch in the long run. (Which could amount to hundreds, potentially thousands more T-Bell odysseys! Or some extra money for retirement or a down payment, your call.)

Often, you’re able to get pre-approved for refinancing online in a matter of minutes. After pre-approval, you select the loan you want, fill out a full application, upload or mail in some key financial documents, and voilà! You’ve done your part.

Here’s the Difference Between Student Loan Refinancing and Consolidation

Consolidation is exactly what it sounds like; You’re consolidating multiple loans into one loan. And that’s it! Because you’re just smushing all of your (federal) loans together without any accompanying re-evaluation of your credit, your interest rate won’t change. The rate on your new consolidated loan will simply be a weighted average of your current loan rates. Your monthly payment would only decrease if your payback period was extended, which would actually cost you more in interest over time.

Loan consolidation is typically done using a Direct Consolidation Loan through the government. This is why you can only consolidate federal loans and not private ones. The benefit to consolidation is creating one payment instead of dealing with multiple loan payments. It is also possible to detach or add cosigners and switch from a variable to a fixed rate.

It’s worth noting that refinancing is sometimes referred to as “private loan consolidation.” And yes, when you refinance multiple loans, you are inherently consolidating them. But for the sake of keeping the two mentally separated, consider consolidation and refinancing as two different actions.

Benefits of Refinancing Student Loans

Ideally, a student loan refinance would benefit you in the following ways:

1. You could pay less in interest over time, which can mean lower monthly payments.

2. It can also shorten your loan term, allowing you to pay debt off sooner.

3. You get to enjoy the benefits of consolidation with one monthly bill.

4. There are both variable and fixed rate loans available. The benefits of having a lower monthly payment or a shorter payback period need no championing, but it is pretty sweet to think about what you could do with all that extra cash. SoFi estimates that the average customer saves $30,069 in interest over the lifetime of their loan.

Additional Refinancing Considerations

When you refinance, not all lenders will give you the same repayment options that federal loans offer. This is important to consider, especially if you work in an industry sensitive to economic cycles. As with any financial decision, refinancing should only be done after considering all of the trade-offs.

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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When you have a student loan balance, it can feel like a dark cloud hanging over you. Many of us have grown up believing that all debt is bad, and we understandably want to get rid of it as soon as possible. We also assume that paying off loans will lead to financial freedom and that we should be completely in the black before committing money elsewhere.

But paying off your student loans as quickly as possible isn’t always the smartest choice financially. Most lenders don’t consider student debt a black mark, and it might also offer you a tax deduction.

Plus paying off loans too aggressively could cause you to miss out on other opportunities—like investing for retirement or a home purchase. In many cases, keeping up with payments while making smart investments might be a faster way to reach your goals.

Here’s a guide to investing responsibly when you still have student debt.

Get Your Debt Organized

Before you even think about investing, you must have your most important financial bases covered. That means: First, make sure you’re never at risk of defaulting on your loans. Pick a repayment plan that works for you, and don’t miss a single monthly payment. Defaulting can ruin your credit, and student loans can’t be wiped out even in bankruptcy, in most cases.

If you are trying to figure out how to budget towards your student loan payments, you can use our student loan calculator to estimate how much you could be paying each month. This is a great way to help prepare for your upcoming bills.

Next, if you have credit card debt, it’s often better to pay that off before considering other investments since those interest rates are typically sky-high. After that, if you have some extra cash on hand, your next step should always be building an emergency fund of three to six months’ living expenses.

Finally, take a look at your debt-to-income ratio. It’s not common, but if your student loans are impacting this ratio in a way that precludes you from a goal like taking out a mortgage, that’s a reason to focus on paying down your debt before anything else. (Not sure where you stand? Set up a complimentary appointment with a SoFi financial advisor, who can give you a personalized recommendation.)

Understand the Idea of Opportunity Cost

Once you’ve got your financial house in order, you can start thinking about whether investing makes sense for you. One way to think about the decision of whether to invest or pay down debt is to think about what you’d be missing out on.

Most student loans have relatively low interest rates, and refinancing can get you an even lower rate. Say your student loan interest is 4%, while the stock market has (hypothetically) yielded average returns of 7% over the last five years. Generally speaking, earning 7% interest makes more financial sense than paying down debt at 4% interest.

Of course, investing always entails the possibility of loss. In our hypothetical scenario above, we assume you would have been entire invested in stocks, which is probably not ideal and depends on your unique appetite for risk.

Additionally, when you invest with a longer time horizon, you’re more likely to weather the market’s ups and downs and earn an eventual return. If you have two years of student loan payments left, that’s quite different than having 10 or 20 years left.

Invest Money to Save Money

“Saving” for retirement is a bit of a misnomer. Retirement accounts, such as 401(k)s or IRAs, are actually funds that let you invest in a wide variety of assets. Since retirement is likely your largest financial goal, investing through a retirement account is often a good place to start putting your extra dollars to work.

Assuming retirement is still a long way off, you probably don’t want to let your retirement savings sit in cash or a low-interest money market account. Instead, consider investing in a portfolio of mutual funds, exchange-traded funds, and other assets that match how aggressive you want to be at the moment. Stay on top off your retirement and see if you are on track with SoFi’s retirement calculator.

If you’re saving for a home but are at least three years away from buying, investing those funds might be a good idea. You can take out up to $10,000 penalty-free from an IRA to defray first-time homebuyer expenses.

If you’re planning to buy sooner than that, the risk of investing might not be worth it. But at least try to make sure your money is in a high-yield savings account (which are currently paying an annual percentage yield of up to 1.5%), rather than in a checking account.

Get Your Money into the Market

For a more flexible investment option, consider opening an individual brokerage account at a financial institution. If you don’t know what investments to pick, the easiest and likely least risky option is a diversified, low-cost portfolio of exchange-traded funds. SoFi offers such investment portfolios based on your risk tolerance and time horizon. Setting up automatic deposits from your checking account will put your investment plan on auto-pilot and ensure you don’t spend that extra cash.

While it may be tempting to run out and buy the latest hot tech stock, this is generally a risky strategy for new investors, since your money is concentrated in a single company, and you have no control over its leadership or market dynamics. People who are passionate and knowledgeable about individual companies like to buy stock directly in specific firms, but for the rest of us, diversifying is usually a better way to go.

Keep Investments and Emotions Separate

Of course, just because something makes financial sense, doesn’t mean it resonates emotionally. Only you know the psychological cost of carrying a heavy student debt burden—it’s not quantifiable. If the mental weight just isn’t worth it, getting rid of your debt as quickly as possible might be the right path for you.

Curious about investing, but not sure where to start? SoFi Invest® is all about empowering you and your financial future, and we’re here to help. Schedule a free personal consultation with one of our financial planners who can help you plot the best path forward.

SoFi Wealth, LLC 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 SoFi Wealth platform is operated and maintained by SoFi Wealth LLC, an SEC Registered Investment Advisor. Brokerage services are provided to clients of SoFi Wealth LLC by SoFi
Securities LLC, an affiliated broker-dealer registered with the Securities and Exchange Commission and a member of FINRA / SIPC. Investments are not FDIC Insured, have No Guarantee and May Lose Value. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Clearing and custody of all securities are provided by APEX Clearing Corporation.
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Graduating from college and starting your career is a time filled with questions and excitement. On the one hand, everything is new and getting to check all the “firsts” (first solo apartment, first salaried job, first absolutely terrible post-grad roommate) off your list is incredibly rewarding. On the other hand, some of those first financial questions can be just a bit overwhelming, especially when it comes to student loans.

Understanding your student loans, whether they are private or federal, and how much you need to pay to make a dent is all new territory and brings on even more questions. But know that you’re not alone. The latest numbers suggest over 44 million people in the country have a total of $1.4 trillion in student loan debt.

As you start managing your post-grad budget, you might realize that student loan payments are a large portion of your monthly bills. If that’s the case, it’s a good idea to start learning about student loan refinancing. Can it get you a lower interest rate? How does refinancing differ from student loan consolidation? And will any of this save you money?

The most important answer, first: Yes, student loan consolidation and refinancing can save you money. However, they are both different, and you’ll need to figure out which option is a better fit for you. Now let’s get into the nitty-gritty.

What is federal student loan refinancing?

If you graduated with student loans, you likely have a combination of private and federal student loans, which are loans funded by the federal government. Direct subsidized loans or Direct PLUS loans are both examples of federal student loans.

Interest rates on federal student loans are fixed and set by the government, so you can’t refinance at a lower rate and keep it as a federal loan. However, you can refinance your federal student loans into private loans with a new—ideally, lower—interest rate.

When you refinance into a private loan, you lose some of the benefits that come with a federal loan, which is worth keeping in mind. However, the new loan (and the new interest rate) could translate to a lower interest rate and paying off loans sooner.

What is the difference between federal student loan refinancing and student loan consolidation?

Student loan consolidation and student loan refinancing are not the same thing, but it’s easy to confuse the two. In both cases, you’re essentially signing new loan terms that replace your old student loans.

Consolidation takes your student loans and bundles them together. This allows you to work with the provider of your choice and qualify for new repayment options. Consolidation, however, does not get you a lower interest rate. Refinancing, on the other hand, takes your old loans and finances them at new interest rates with a private lender.

You can consolidate federal loans into a federal Direct Consolidation Loan at no cost. This keeps your loans federal and can give you a longer repayment timeframe, and simplifies the repayment process to help you not miss payments. But it doesn’t necessarily save you money. Generally, the new interest rate on your federal direct consolidation loan is the weighted average of your original loans’ interest rates. For some people, even if it doesn’t save them money, the streamlining of loans is worthwhile.

What are the benefits to federal student loans?

There are a number of benefits to federal loans that aren’t always available for private loans. For example, you may be eligible for the Public Service Student Loan Forgiveness program if you’re working in public service and have made 120 loan payments.

You may also have access to certain income-based repayment plans or protections on your loans if you default or miss payments. However, as with all things, there are pros and cons. Loan forgiveness is great if you qualify, but double-check the requirements before thinking you can just write off all that debt. And income-based repayment plans can be a life-saver if you’re in between jobs or just getting started, but it may mean you pay more over the life of your loans.

Should I refinance my federal student loans?

It depends on how much you might save with a lower interest rate from a student loan refinance, versus how likely you are to use the benefits that come with having federal student loans.

First, you can use the SoFi student loan calculator to figure out how much you might save with a lower interest rate. In general, borrowers often refinance federal graduate student loans and PLUS loans, since those have historically offered less competitive rates.

Next, ask yourself: Are you going to use the programs or benefits that come with federal student loans? These include income-based repayment plans , as well as loan forgiveness for teachers, doctors, or even lawyers in public service. If that’s you, great, but if it’s not, that’s OK too. (There is also some concern Public Service Loan Forgiveness programs could disappear .

There are some downsides to income-driven student loan repayment plans, too. You can end up paying more in interest or get hit with a higher tax bill after your loan is forgiven. However, depending on your financial situation, that flexible repayment plan could be a saving grace. It depends on how much you have in federal student loans and how confident you are about your repayment options.

The last thing you’ll want to consider before you opt to refinance your student loans is the terms of your new student loan. Weigh all the costs and benefits, and figure out what makes sense for you. We know you can do it. After all, you’re a college graduate.

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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