The 6-month grace period provided by the federal government and numerous private lenders for paying back student loans will soon come to an end for 2015 graduates. The first student loan payments from these borrowers will soon be due, and that will be a scary thing for many as the bills start to rack up.
This article will explain how to take control of your student loans through federal programs, private student loan consolidation, and private student loan refinancing.
Federal Student Loan Income-Driven Repayment Plans
If you have a federal student loan, your monthly repayments may depend on your discretionary income, which is defined as the amount by which your adjusted gross income exceeds the poverty line.
The most common repayment programs are:
- Income-Based: Pay 10-15 percent of your discretionary income over a 25-year term.
- Pay As You Earn: Pay 10 percent of your discretionary income over a 20-year term.
- Income-Contingent: Pay the lesser of two options, being 20 percent 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, all remaining student debt is forgiven.
You can read more about the pros and cons of these federal options here: Pros and Cons of Income Based Repayment Plans. More information on student loan repayment options is available from the U.S. Department of Education’s Federal Student Aid office.
Some borrowers who may not qualify for federal income-driven repayment options, or who have private student loans, can benefit from consolidation or refinancing.
What is Student Debt Consolidation?
Loan consolidation means combining multiple loans into one single loan. This is done mostly for convenience, to simplify the process and end up with only one monthly payment.
Consolidation Might Not Always Help
As the Federal Student Aid website notes, student loan borrowers should be cautious when consolidating their student loans. Borrowers may initially be tempted to consolidate into a loan with an extended term. While taking longer to pay off debt can significantly reduce a borrower’s monthly payment, a longer-term loan could also result in thousands of dollars in additional interest payments. Student loan consolidation may result in switching lenders, which could lead to the loss of some borrower benefits, such as interest rate discounts, principal rebates, or loan cancellation benefits.
What is the Interest Rate on Consolidated Student Loans?
Consolidated student loans through the federal government are calculated by taking the weighted average of the interest rates of all the separate loans being packaged together-the repayment term and the lender can be changed during the consolidation process.
Can Private Education Loans be Consolidated?
Most federal student loans are eligible for government-backed consolidation, but private education loans are not. You can still consolidate private student loans, but you can’t do it through any government program.
What is Student Loan Refinancing?
Student loan refinancing is taking out a new loan to pay off the existing loans and combining them into one. Unlike consolidation, student loan refinancing allows the borrower to seek better interest rates and repayment terms, reducing both monthly payments and the total repayment amount of student debt. A borrower can refinance both federal and private loans, but is not required to refinance all of their loans — just the ones that make the most sense financially.
When Refinancing Makes Sense
Even though many people don’t think twice about refinancing their mortgage or auto loan, student loan holders often don’t look into refinancing solutions. Yet those who end up refinancing their student loans can walk away with thousands of dollars saved over the life of their loan.
Student loan refinancing makes the most sense when a borrower has high interest rate loans. In these situations, borrowers with steady incomes and above average credit scores are frequently able to lower their rates and save significant amounts. (The average user who refinances with Credible saves over $11,500 in interest payments!)
Student loan refinancing is also not one size fits all. Assessment is based on a borrower’s financial status, income, credit score, comfort level, and beyond. There are many lenders and services that provide guidance on options on what is best for each borrower.
For more information on student loan refinancing, check out Credible.
Kristen Caron is a member of the DailyWorth Connect program. Read more about the program here.