Are you being crushed by student loan debt? Are you finding it impossible to make your monthly payments? It’s not impossible to get out from under the burden. Signing up for a different type of repayment plan or consolidating your loans could help you manage them more effectively.
Everyone with a federal student loan is automatically enrolled in the Standard Repayment Plan when they graduate from or leave college. This plan assigns equal fixed monthly payments over a ten year period. Under this plan, you repay your loan in the fastest period of time with the least amount of interest. However, the monthly payments can be high.
The good news is that there are alternative repayment plans available based on your income including:
Under these plans, your repayment term is extended to 20 or 25 years, and your monthly payments are capped at a percentage of your income. Depending on your income, family size and the balance on your loan, your payment could be much lower than under the standard plan. As your income and personal life change, your payments are adjusted based on your new situation.
Note: Your payments will likely be lower with an income based repayment plan than a standard one. However, you’ll pay significantly more interest over the term of the loan. It’s up to you to decide if the trade off is worth it.
If you earn too much to qualify for an income based replacement plan, you may be able to lower your payments by signing up for a Graduated Repayment Plan.
Monthly payments under a Graduated Repayment Plan start out low, then go up every two years. The term of the plan is ten years. This can provide a temporary respite from high student loan payments, but they could become even more overwhelming in a few years. Another issue: You will pay more interest on a graduated plan than a traditional one.
If you have more than $30,000 worth of federal student loans, you might qualify for an Extended Repayment Plan. Under this plan, you can take up to 25 years to repay your loan, and you are able to select either fixed or graduated payments.
Payments under an extended repayment are generally lower than with a Standard Repayment Plan or Graduated Repayment Plan because the term is longer.
Similar to other alternative repayment plans, you could end up paying significantly more in interest than under a standard plan.
If you have more than one federal student loan, each with a different interest rate, repayment term and monthly payment, consolidating then into a Direct Consolidation Loan could be a smart move.
With a Direct Consolidation Loan, you take out another loan equal to the amount of all your loans and make a single monthly payment on it.
The interest rate of the new loan will be the weighted average of the interest rates of your previous loan. Whether it will reduce your monthly payments isn’t guaranteed, but it’s worth looking into.
Before you take action, take time to understand the ramifications. Calculate your monthly payments and interests costs over time. Lowering your monthly payments might provide immediate relief, but it could turn into an even more crushing burden over the long term.