How to take control of your student loan payments

Student debt is a hot topic these days, sparked by the federal government’s loan payment forbearance that started at the beginning of the pandemic in 2020. While the Biden-Harris administration’s efforts to forgive a chunk of debt are still evolving, there are measures you can take in order to take control of student debt— especially considering that interest began accruing again on September 1, 2023. With the end of the federal student loan payment pause, there are a few options you can explore.

Your options to take control of student loan payments

As with all advice, there is no one-size-fits-all solution. Your situation is unique and requires some personal consideration. But knowledge is power, and you need to know your options before you can make an informed decision on repaying, postponing or refinancing your student loans. Once federal student loans are back in repayment, you can choose from any of the options below:

1. Income-based repayment: If you have a qualified federal student loan and low to no income now, you could apply for income-based repayment. With this option, your loan payments are determined by your income and family size. Generally, they’re based on a certain percentage of your discretionary income, which is the income you have after taxes, housing and utility expenses, and food.

The federal government offers four types of income-based or income-driven repayment options: 

• Saving on a Valuable Education Plan (SAVE)
• Pay As You Earn Plan (PAYE)
• Income-Based Repayment Plan (IBR)
• Income-Contingent Repayment Plan (ICR) 

All four options base your payments on your income, but the plan that’s right for you depends on eligibility, how much you can afford to pay each month, the duration of the repayment period, and the types of loans you have. If you want an estimate of your monthly payment with income-based repayment, you can use the federal government’s Loan Simulator. 

Income-driven repayment plans could help you lower your payment or even reduce it to $0 if you have no income. Be aware, though, that if you’re approved, you’ll be extending the term of your loan beyond the standard 10-year repayment period, which will result in you paying more interest over the life of the loan. Income-based repayment plans do, however, offer loan forgiveness after 20-25 years. That means if you have an outstanding balance after that time, you may not have to repay the remainder of your loan, though you could potentially have to pay taxes on the amount forgiven. 

Also, if you’re approved for income-based repayment, you’re required to recertify your income with the government every year. So, if your income or family size changes each year, your payment will be adjusted accordingly. 

If you’re considering income-based repayment, you’ll need to work with your student loan servicer (the entity that handles your student loan repayment) for every federal loan you have. Some loans, such as some Perkins Loans and Federal Family Education Loans (FFEL) may not be eligible, though you could consolidate them into a Direct Consolidation Loan, which would be eligible.

2. Forbearance or deferment: If you expect your income to be lower for a shorter time period, you can request  forbearance or deferment. Both options allow you to temporarily postpone your payments. The option that's right for you depends on your unique circumstances and whether you qualify, but in some situations, you could pause payments for up to three years.

There is a downside to both forbearance and deferment: Interest accrues during the period when your payments are paused (unless you have a loan in which the government pays the interest). That accrued interest could be added to the amount you owe and end up costing you a lot more in the long run.

Let’s use an example. Suppose you have an outstanding balance of $35,000 on your federal loan at an interest rate of 6%. If you defer payments for one year, you’ll end up paying an additional $2,100 in accrued interest. That would increase your loan balance to $37,100 and your monthly payments from $388 to $411.

That brings us to another downside to federal loan forbearance and deferment after June 30, 2023: the deferred payments will not count toward your eligibility to enroll in loan forgiveness programs. Depending on your circumstances, income-based repayment may be a better option than deferment or forbearance. If, however, you’re interested in learning more about deferment or forbearance, talk to your loan servicer.

Also, though forbearance and deferment are available with federal student loans, private student loan lenders may also offer similar programs. Be aware that programs can vary significantly by lender, so carefully review the details before you proceed.

3. Student loan refinancing: Many student loan borrowers have several loans, including a combination of federal student aid and private loans. You could potentially combine all of your loans into a single, more affordable loan by refinancing with a private lender.

You can refinance your federal student loans to a private loan — and potentially lower your rate — but it may result in the loss of federal loan benefits such as income-based repayment, loan forgiveness, forbearance, and deferment. To qualify for refinancing, you need to have a good credit history or a cosigner with a  strong credit score. If you’re able to refinance, be sure to take advantage of other opportunities to lower your rate like automatic payments or loyalty discounts.

If you have multiple student loans with the government and want to maintain your federal loan benefits, you could consolidate them into one federal loan — a Direct Consolidation Loan. You won’t get a lower interest rate, since your new rate will be a weighted average of all your existing loans, but you could extend the term of your loan to reduce your monthly payments.

Take action early around your student loan repayment plan

If you’re worried about your ability to make your payments today or in the future, be sure you seek help right away. Late payments could damage your credit report, which could impact your ability to borrow in the future. They could also lead to default, which, for federal loans, can have serious consequences such as wage, bank account, and tax return garnishment, as well as legal action.

Ready to get some relief from your student loan payments?

The payment relief option that’s right for you depends on your situation. Our dedicated colleagues are available to help you make the best choice for your circumstances. Visit us to learn more about our Student Loan Refinancing.