Finding The Best Student Loan Repayment Plan

August 12, 2015

Connect Member

Communications Manager at Credible, an online marketplace for student loan refinancing.

If you are saddled with student loan debt, student loan repayment plans can be a great option to alleviate some of the burden.

Repayment plans are not a one-size fits all solution, but vary based on your income, credit history, and several other factors. The following article outlines the numerous student loan repayment plans available and how to determine which may best suit your personal financial situation.

Federal Income Driven Repayment Plans

If you have a federal student loan, you may be eligible for an income driven plan based on your discretionary income. Discretionary income is defined as the amount by which your adjusted gross income exceeds the poverty line.

The most common income driven plans are:

  • Income Based: Pay 10-15% of your discretionary income over a 25-year term
  • Pay As You Earn: Pay 10% of your discretionary income over a 20-year term
  • Income Contingent: Pay the lesser of two options, being 20% of your income over a 25-year term, or a fixed amount over a 12-year term

Another advantage of income driven repayment plans is that once you finish the stipulated repayment term, any remaining student debt is forgiven. It is important to note though, that if your income rises over the term of the loan, you may no longer be eligible for the program you are enrolled in.

Prepayment On Student Loans

You can make prepayments on any educational loan without incurring a penalty fee. If you are able to afford it, it is often beneficial to make prepayments on your student loans as it will give you the benefit of paying less over the life of your student loans, with less interest accrued. For instance, if you have a $200 per month loan payment, but you pay $250 instead, the extra $50 can go towards reducing the principal of the loan, minimizing future interest.

Be careful to inform your lender about any prepayment to be sure that it goes towards paying off the loan principal and not towards your next loan repayment.

Student Loan Consolidation

Student loan consolidation is when you combine multiple student loans into a single new loan with one monthly repayment. If you consolidate your federal student loans through the federal government, your rate will be the weighted average of the interest rates of all the separate loans being combined. The repayment term and servicer can change during the federal consolidation process.

A private student loan consolidation can consolidate private student loans and federal student loans into a new single student loan. It is important to note that either type of consolidation could lead to the loss of some benefits associated with your original federal student loan.

Student Loan Refinancing

Student loan refinancing is the process of consolidating your existing student loans into a new loan, often with a lower interest rate and different repayment terms.

Most student loan refinancing lenders can refinance both federal and private student loans. It is important to know that you do not have to refinance all of your student loans, only those that you choose to refinance. At Credible, we see many of our users consolidating only their high interest rate student loans while keeping their existing, low interest rate loans separate.

Be sure to research and compare all of your repayment options to determine which is best for your personal financial situation. Check out Credible to see personalized refinance offers from multiple lenders after completing a single form.

Kristen Caron is a member of the DailyWorth Connect program. Read more about the program here.