Paying Student Loans: What Are the Options?
About 30% of people who have student loans are 90 days or more behind on payments. This can do a number on your credit and put home purchase plans at risk. If you have student loans, getting those payments under control is a big part of the credit repair process. What many people do not know is that there are many plans available to make payments fit your budget. Payment options include:
- Standard Repayment is exactly what it sounds like. This is usually the highest out of pocket per month, but will frequently save the most in interest over time.
- Graduated Repayment operates under the assumption that your income will increase over time. Early payments are lower than later ones. With these, you will pay more for interest over the life of the loan.
- Extended Repayment stretches the repayment period from 10 to 25 years. Payments are lower throughout the life of the loan, but, it costs more in interest in the end.
- Income Based Repayment uses a formula to arrive at affordable payments. Your payment will be equal to 15% of the difference between your income and 150% of the federal poverty level. After 25 years of payments, the balance of the loan is forgiven.
- Income Contingent Repayment is similar to IBR. Your monthly payments each year are based on last year’s adjusted gross income and your family size. After 25 years, the balance is forgiven
- Income Sensitive Repayment has payments that change as your income changes. The term of this loan is up to 10 years and the formula varies by lender.
- Deferments and Forebearances temporarily allow you to reduce or postpone student loan payments. These can be helpful for avoiding default if you are temporarily unable to pay your student loans. If your inability to pay your loans is ongoing, it’s best to make arrangements for a different payment plan.
- Lump Sum Payoffs are simply payoffs of one or more student loans and the capitalized interest. Many people will opt to pay off one or more student loans if they come into a large sum of money. On the plus side, this saves you interest that you would have paid over the loan and stops the debt from hanging over your head. On the minus side, putting that lump sum of money into a student loan means that it is not available for other purposes such as buying a house or investing in your retirement.