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You might be the kind of person who relishes spending money on exciting purchases, but can’t stand paying for boring things, like $8 shipping or a $25 oil change. And while it’s fair to be stingy sometimes, it doesn’t make sense to stress out about the inevitable costs of living while ignoring the far more important kind of spend: how much of your money goes toward accruing interest on debt.

The average American family has approximately $16,000 in credit card debt , and even more if you’re counting other types of consumer debt. If they’re paying the average credit card interest rate of 16.4% APR, they’re shelling out thousands of dollars per year on interest charges alone. That’s worth putting some thought and action toward. If you have credit card debt, use our Credit Card Interest Calculator to see how much interest you are paying.

With interest rates running into double digits, it’s no wonder people are seeking out ways to lessen interest payments. That’s where a debt consolidation loan comes in. Here’s how to determine if it is the right choice for you.

What are debt consolidation loans?

A debt consolidation loan is another name for a personal loan that you use to pay off other sources of debt, such as credit card debt. You’re basically just taking out a new loan out from a bank, credit union, or other non-bank lender and then using that money to pay off existing debt.

This is not the same as debt or credit relief, where a credit counselor helps you reduce interest rates or eliminate debt altogether. Credit relief programs can help you consolidate your debt, but they aren’t getting you a new loan—it’s only consolidation.

With a personal loan—also called a debt consolidation loan—you can merge multiple payments into one streamlined payment and potentially lower the combined interest rate. To put it in perspective, the average credit card interest rate is 16% APR.

When should you take out a personal loan for debt consolidation?

Most people considering a personal loan—also called a debt consolidation loan—feel overwhelmed by having multiple debt payments every month. A personal loan can lighten this load for two reasons. For one, you can lower the interest you pay on your debt, which means you could potentially save money on paying interest over time.

For two, it can also make it possible to opt for a shorter term, which could mean paying off your credit card debt years ahead of schedule. If it’s possible to get lower interest than you have on your current debt, or a shorter term on your debt to pay it off faster, a personal loan could be worth looking into.

On the other hand, you’ll also want to be careful about fees that might come with your new loan, separate from the interest rate you’ll pay. For example, some online lenders charge a fee just to take out a personal loan, and some don’t, so you’ll want to do your research.

How are personal loans used for debt consolidation?

Generally, people seeking debt consolidation loans have multiple sources of debt and want to accomplish two things: First, lower their interest rate—and thereby pay less each month—and reduce the amount they have to pay over the life of their loan. Second, they are trying to merge multiple loans into one, making it easier to keep track of monthly payments.

With a lower rate of interest, you are able to lower your monthly payment, shoring up money for other expenses or financial goals. You can also opt for a shorter repayment term, which shortens your payback period and gets you out of debt faster.

Who is eligible for a personal loan for debt consolidation?

If you have one or more sources of debt where the interest rate is higher than 10%, it’s worth exploring a personal loan. While there’s no guarantee that you’ll find a lower interest rate, you can’t know unless you get quotes from a few lenders. (And these days, it’s a pretty painless process. If it proves difficult, find yourself a different lender.)

Those with the best credit scores will typically qualify for the best rates on their new personal loans, but don’t let an average or even poor score keep you from requesting quotes. This is especially true if you have more than $10,000 in credit card debt and those cards charge exorbitant interest rates, which most of them do.

Also know that your credit score isn’t the only data point that’ll be considered in determining whether you qualify for a loan and at what rate. Potential lenders typically also consider employment history and salary, and other financial information they deem important in determining loan-worthiness.

A personal loan isn’t for everyone. If you’re doing it only for convenience and there isn’t a legitimate financial motive, it’s probably not worth it. Instead, focus that energy on paying back the money you owe as efficiently as possible.

While personal loans can be a great tool to reduce interest payments, it doesn’t reduce the actual debt you owe. If you’re looking to get out of debt so you can focus on other financial goals, but the interest rates on your debt are making it nearly impossible, a personal loan could be exactly what you need.

 

Considering a personal loan to consolidate your debt? Head to SoFi to see what rates you may qualify for.

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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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit .

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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.

If it’s right for you, check your rates in two minutes to refinance your federal student loans. SoFi’s student refinance loan is a private loan and does not have the same repayment options/benefits offered by federal programs. You should explore and compare federal and private loan options, terms, and features to determine what is best for you and your situation.

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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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You probably already know that you should have an emergency fund—a bit of extra cash on hand in case of an unforeseen event, like getting laid off or needing to move.

But many of us don’t know more than that. How much should you have? How, exactly, do you save that cash? And should you focus on building this fund or paying off debt first?

SoFi advisor and Certified Financial Planner Alison Norris recently talked about all of this and more at a recent #WealthWednesday discussion on the SoFi Member Facebook page. (Yep, SoFi members have daily access to complimentary advisors on social media and via phone—check out more about the SoFi Member Benefits.)

And today, we’re bringing that discussion, as well as other common questions about emergency funds and her expert answers, to you.

How much should I have in an emergency fund?

Your emergency fund should be three to 12 times the amount you spend monthly. The exact amount should reflect your risk aversion to unexpected unemployment. If you have reason to believe you could quickly land another job—say, you’re a software engineer in San Francisco—then you might be comfortable with three months’.

If, on the other hand, you’d expect a longer job search—for example, you’re in a specialized line of work, or a finding a new job would likely entail moving to a new city—your emergency fund should reflect that

Also, consider this: Would you be willing to amend your lifestyle if income slows or something costly crops up? If you’re OK living on a friend’s couch eating ramen, then you might survive with a smaller rainy day fund. If you wish to keep living the life you’re accustomed to, then you may want more of a backup.

Where should I keep my emergency fund—my checking account, a savings account, or elsewhere?

You want to keep your emergency fund money “liquid,” or available to access as soon as you need it. It’s also smart to separate cash on hand from your emergency fund. Cash on hand can be left in your checking account, earmarked for paying upcoming bills. Your emergency fund works well in a FDIC-insured savings account.

With that said, many savings accounts only pay you 0.01% interest on cash balances. This doesn’t keep pace with inflation, so you’re essentially losing money. Instead, you might consider a high-yield savings account that earns 1.0% interest or more. Bankrate is a good place to compare your options.

What do you suggest if you have roughly $5K built up so far for an emergency fund and also about $3K in credit card debt?

Should I wipe out the debt and then build the fund back up, or chip away at the debt and maintain the fund?

I might suggest knocking out that credit card debt in full. Here’s the order of operations that works best for most:

•   1. Keep enough cash on hand to pay recurring bills and avoid living paycheck to paycheck. (This isn’t your emergency fund, just cash that’s good to have on hand.)

•   2. If your employer matches contributions to a retirement plan, max out that match.

•   3. Pay off consumer debt, including high-interest credit cards.

•   4. Build your emergency fund.

Also keep in mind that the comfort of having a cash cushion and not living on the financial edge may outweigh other purely financial benefits of wiping out high-interest debt. Sleeping soundly at night is another benefit to building up an emergency fund.

Could a credit line be considered a pseudo emergency fund?

While I don’t have credit card debt, I do have a ton of student loans I want to pay off more aggressively. My credit cards would allow me to live for a good three months or so if I needed to.

I commend your desire to pay off your student loans aggressively, but I wouldn’t do so if it means you would instead have revolving credit card debt.

Say, for example, you have a 6% rate on your student loans and a 20% rate on your credit card loans, and $1,000 in outstanding debt with both. You’ll end up paying $140 less toward your student loan each year (maybe even less because there are tax deductions for student loan interest). I might suggest prioritizing the emergency fund while making minimum payments on your student loans.

What’s the best way to save up for my emergency fund, quickly?

The basic equation for wealth building is: Money In – Money Out = Money Saved.

But you don’t need us to tell you how math works. The key is to figure out which levers to pull to increase your odds of success.

Start by tracking your expenses, either in a spreadsheet or using a free service like Mint.com. You’ll quickly get a handle on your monthly cash flows, which will enable you to target an emergency savings goal tailored to your needs.

The next step is key: Pay yourself first. Schedule recurring auto-deposits into your savings account to coincide with your paychecks. You’ll find this cash flow will quickly become painless and invisible. More importantly, it ensures that when you overspend in a given month, it’s discretionary items—like eating out one more time—that get cut, rather than your savings.

I’m almost at my savings goal for my emergency fund. Where should I put my money next?

The earlier you save for retirement, the better, so you can let the power of compounding interest work for you. And even better than compounding is free money. For both reasons, the first place to invest for retirement should be in your employer-sponsored retirement plan, if you have access to one.

Many employers will match part of your contribution, which is essentially free money. Once that match is met, aim to keep contributing to tax-advantaged accounts. You can invest in the employer retirement beyond your match, contribute to an IRA, or (our preferred strategy) both. To understand which IRA account you can contribute to, use this IRA calculator.

From there, document your assets and liabilities. Know your good debt from bad. A mortgage or student loan? Good. A high-interest credit card? Not so good. Also write down your long- and short-term goals—for example, paying for wedding, saving for a house down payment, or even taking a summer vacation.

Once you’re saving for retirement, you can plan a savings or investment strategy for these goals, based on their time horizon.

Are you ready to start saving? Learn more about SoFi Invest® to see if it is the right fit for you!

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SoFi can’t guarantee future financial performance. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite. Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
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 can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Neither SoFi nor its affiliates is a bank.
SoFi Checking and Savings^TM is offered through SoFi Securities, LLC, member FINRA / SIPC . Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.

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Got student loans? We’ve got you covered with our Student Loan Smarts blog series. Our expert tips and hacks will help you save money, pay off loans sooner, and stress less about student loan debt. Read the other posts in the series to get all the info you need to make intelligent decisions about your student loans.

Student loans are the ultimate double-edged swords. Invest wisely in your education, and those loans should pay off in the form of higher income over time. But if you mismanage student loan debt, your credit score could suffer—and that could have a big impact on your financial future.

As a student loan lender, we get a lot of great questions about how student loans affect credit score. Here are the top seven.

1. Do I need a good credit score to take out a student loan?

The answer depends on whether you’re talking about federal or private student loans.

Federal loans don’t take credit scores into account, which is why mosevery borrower gets the same interest rate regardless of financial profile. However, federal PLUS loans do require that borrowers not have an adverse credit history , which is defined by FinAid as “being more than 90 days late on any debt, or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment or write-off.”

Related: 5 Tips for Getting the Lowest Rate When Refinancing Student Loans

For private lenders, your credit score is usually a key factor in determining not only student loan approval, but also the attached interest rate. In other words, the better your score, the better your rate. But SoFi does things a bit differently—our non-traditional underwriting process looks beyond your credit score to take into account factors such as education and career. This allows us to provide competitive interest rates on student loan refinancing.

2. Which credit scores do lenders use?

Most private student loan lenders use FICO credit scores to determine whether to extend credit and at what interest rate. Since FICO is used widely throughout the lending industry, including by mortgage, auto loan, and credit card providers, it gives lenders an apples-to-apples comparison of potential borrowers.

3. How is my credit score calculated?

Unfortunately, how FICO calculates your credit score is kind of a black box. While the various factors and weightings
used in the calculation are publicly available on FICO’s website, its algorithm is proprietary, which means that no one can predict exactly how a specific financial event will affect your score. For example, a late payment will likely reduce your score, but by how many points is anyone’s guess.

That said, there are generally three key ways to improve your credit score : pay bills on time, keep credit card balances low, and reduce the amount of debt you owe.

4. How does a late student loan payment affect my credit score?

Making payments on time is obviously important, but what you might not realize is exactly how damaging it is to not pay on time. Even if your credit history is pristine, it only takes one 30-days past due report to cause a material change in your score. Whether you were short on cash or just simply forgot, the FICO algorithm doesn’t distinguish—and the result is the same.

Recommended: How to Choose Between Variable and Fixed Rate Student Loans

So, if you have trouble remembering to make your payments, set up an automatic payment plan; most lenders will give you a small discount on your interest rate for doing so. When you know you can’t make a payment on time, talk to your lender or loan servicer right away.

Most federal loan lenders and some private lenders offer loan deferment and/or forbearance , allowing you to temporarily suspend payments, which will minimize the impact on your credit score. But remember, there’s absolutely nothing your lender can do to help if you don’t return their calls.

5. Will shopping around for a better student loan interest rate hurt my credit score?

We hear this question a lot from grad school borrowers and those refinancing student loans to get the best interest rate possible on a private loan.

One factor that can be a red flag for FICO is the number of inquiries it receives from lenders wanting to see your credit report. In other words, if it looks like you apply for more credit often, it could negatively impact your score. But the good news is that FICO attempts to distinguish between a request for a single loan and a request for many new credit lines. As long as you rate-shop in a concentrated period of time, you should be okay.

If you really want to avoid inquiry overload, do your homework before applying for a loan. Private lenders typically list online the range of rates they offer, as well as general eligibility criteria. Researching that info will give you a good idea of whether you’ll qualify before you formally apply.

Also, be sure ask lenders if they can tell you the interest rate you would receive without doing a “hard” credit pull, which might affect your score. You can’t get a loan without an eventual inquiry, but this service allows you to compare interest rates worry-free before applying for a loan.

6. Will refinancing student loans help my credit?

Refinancing student loans at a lower interest rate can have an indirect positive impact on your credit. For example, refinancing may lower your monthly payments, making it less likely you’ll miss or be late with a payment.

And if you refinance federal loans with a private lender (in effect, turn your federal loans into a private loan), rest assured that credit bureaus don’t view these two types of loans any differently.

7. Will paying off student loans too quickly damage my credit?

Some people reason that because education debt is “good debt,” FICO must view it more favorably than other types of debt. And because credit scores can be improved by having open accounts that are paid on time, they think that paying off a student loan early might actually work against their score. But, while there’s no definitive answer to this question (remember: black box), there are a few things to keep in mind before buying into this belief.

Read Next: Student Loan APR Vs. Interest Rate – 5 Essential FAQs

First, FICO doesn’t see your student loan debt as being good or bad. In fact, the agency doesn’t distinguish it from any other type of installment debt, such as mortgage or auto loan debt. Incidentally, while installment debt is different from revolving debt (like credit card debt), it’s generally better to have positive track records with both of types of loans .

Second, it’s true that FICO likes to see how you manage your debt. So, if you have an open account in good standing, that could help your score—but the impact would likely be small. And closing any account satisfactorily is generally a positive thing for your credit, so that could help your score, too.

Bottom line: Instead of worrying about how prematurely paying off your student loan will impact your credit score, consider the potential trade-offs. For example, how much extra interest are you paying by leaving the account open? Also, a high loan balance may make it harder to qualify for new loans—something to think about when it comes time to buy a home.

Take Care of Your Credit Score

Credit is a powerful tool that can allow you to do a lot of great things, but if you’re not careful, it can hold you back. For many people, student loans represent their first experience carrying a large debt load, which means mistakes are almost inevitable. The most important thing you can do is learn how to take good care of your credit score—and eventually, it will take care of you, too.

Here at SoFi we want to help you through your student loan journey. We’ve created a student loan help center to give you the resources you need to find the best strategy to pay off your student loans.

Are you paying off your student loans? Learn more about student loan refinancing with SoFi.

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Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.
SoFi Lending Corp. or an affiliate is licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612. NMLS #1121636. Terms, conditions, and state restrictions apply; see SoFi.com/eligibility.
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’re struggling under the burden of federal student loans, the possibility of loan forgiveness sounds like a fantasy. But thanks to the expansion of the government’s income-driven student loan repayment plan called Pay As You Earn (PAYE), more borrowers are inching close to student loan forgiveness than ever before.

PAYE was previously only available to people who took out loans after October 2007, but last year, the Department of Education launched the Revised Pay As You Earn (REPAYE) plan, which expanded the program to all eligible borrowers regardless of when their loans were disbursed.

A leg up for those borrowers who have trouble making ends meet, PAYE and REPAYE limit monthly student loan payments to 10% of their discretionary income and, after 20-25 years (10 years if you work in public service), forgives the remaining loan balance.

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 repayment 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 economic 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.

Right about now you’re probably thinking, Lower payments and eventual loan forgiveness—where do I sign?

But there’s a catch. There’s almost always a catch.

While the idea of loan forgiveness may sound like the ultimate ‘get out of loan-jail free’ card, income-driven plans like REPAYE, PAYE and their predecessor, Income-Based Repayment (IBR), come with some less-than-obvious costs.

Costs Associated with PAYE and Income-Driven Repayment

In some cases, those costs outweigh the potential benefits—even the benefit of ultimate loan forgiveness. What costs should you be aware of when it comes to income-based repayment plans? Here are the big three:

1. The Straight Costs

Under an income-driven plan, lower student loan payments are primarily a result of lengthening your loan’s term from the standard 10 years to 20 or 25 years, depending on the plan. You still owe the same amount in terms of principal, but you’ll pay it off much more slowly and make a smaller dent—if any dent at all—in the principal with each payment.

In other words, an income-driven plan is a recipe for significantly higher interest costs than you would incur with a 10-year repayment plan. Plus, any loan balance forgiven at the end is taxed as income by the IRS.

How much do these costs matter? Let’s say you’re a single California resident with a $100,000 direct subsidized 10-year loan at a 4% APR, and you make $50,000 per year with a projected 5% annual salary bump.

On the standard repayment plan, you’d spend $121,494 total on principal and interest over 10 years. But on REPAYE, you’d spend $173,225 total—and you’d pay off your loan just a few months shy of the 25-year forgiveness mark.

Of course, your own income and loan details will make a difference in the outcome here, so find out how different repayment plans would affect you, check out our Student Loan Navigator tool, which can help personalize options to your situation.

2. The Surprise Costs (and Administrative Burden)

Under any income-driven repayment plan, you have to “recertify” your income and “family size” annually. Recertification can be a cumbersome process, and if you miss the deadline, which happens over 50% of the time, according to the Department of Education, things can get messy.

For one thing, if your payments are so low they don’t cover your monthly interest cost, the interest builds. Miss the recertification deadline, and you risk having accrued interest capitalized, or added to your loan’s principal.

Paying interest on your interest can cost you thousands more over the life of the loan.

Late recertification can also delay the date your loan is eligible to be forgiven, since you are automatically removed from the plan each time your certification lapses, and then put back on once you’ve completed the process.

Since time spent off the plan doesn’t count toward the 20-year forgiveness requirement, this could mean making some extra monthly payments before forgiveness can occur.

Additionally, if your income steadily increases and you’d like to switch to a standard plan to save money and be done with debt sooner, you may want to think twice. If you leave REPAYE all your accrued interest is capitalized, which means the longer you’ve been using the plan, the more the amount you owe has increased.

3. The Emotional Cost

Imagine for a moment that you do make it to the promised land of student loan forgiveness under an income-based repayment plan.

That means you’ve spent 20 years experiencing some level of financial hardship to make monthly payments toward a balance that might have grown exponentially with each passing year (if your payments were so low they didn’t effect the principal).

In other words, there’s an emotional tax attached, and that’s probably not what you pictured when you signed up.

The more common scenario (and frankly, the more desirable path) is that your financial picture will improve over time—you’ll get job offers, raises, and maybe even an inheritance or a bonus or two. And if that means becoming ineligible for eventual loan forgiveness, you’re probably going to be okay with the trade-off.

The Big Picture

Despite its downsides, an income-based repayment plan can be a useful tool for some borrowers. If you have a large amount of student loan debt, a low-to-modest salary, and, most importantly, don’t anticipate your income increasing much over the next couple of decades, you should give it serious consideration.

If, on the other hand, you expect your salary to moderately increase at some point, an income-driven plan could cost you more money in the long run.

The Main Income-Driven Repayment Options

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 get taxed on the amount that’s forgiven. If lowering your monthly loan payments is the goal, but you don't want the costs and headaches associated with REPAYE, consider refinancing your student loans at a lower interest rate instead.

Refinancing can decrease your payments and cut your total interest costs significantly. You can also shorten your payment term to save even more money, and be done with loans that much sooner.

For the borrower who bets on eventual loan forgiveness as a panacea for student loan woes, it’s important to take a hard look at the price of that journey. Because, in the end, loan forgiveness is never free. Get more information on forgiveness and other student loan strategies at SoFi’s student loan help center.

Check out refinancing your student loans with SoFi to see if it is the right decision for you.

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SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

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