I Have Student Debt. What Are My Options?

I Have Student Debt. What Are My Options?

Though it may seem like it during school, federal student loans are not free. Like any other type of loan, they must be paid back with interest. Here are a few things to keep in mind when preparing to repay your loans. Every case is unique, just as unique as those who hold the debt responsibility. This is a tool of guidance to get you asking the important questions. Your Catholic Advisor will be able to guide you further.

Know Your Loans and Loan Servicers

After your federal student loans are fully disbursed, the U.S. Department of Education, your lender, assigns your loan to a loan servicer. Your loan servicer then handles your loan, including billing, repayment and answering any questions you may have. If you have multiple federal loans, you may have multiple loan servicers. To get a full look at all of your federal student loans and servicers, visit the National Student Loan Data System at www.nslds.ed.gov.

Know Your Repayment Options

The flexibility with repayment is one of the biggest benefits of borrowing federal loans. At graduation or withdrawal from school, there are several repayment options available to you, determined by the type of loan and its servicer. This includes the following common options:

• Standard repayment plan – Many loan services place repaying borrowers on this plan by default, unless you request a different plan. This option typically saves you money over time because you pay off your loan in the shortest amount of time, eliminating the long-term toll of interest. Monthly payments are made for up to 10 years at a fixed rate of at least $50 each month. The monthly payments tend to be higher than other repayment options, which shortens the length of time it takes to repay the loan.

• Graduated repayment plan – Monthly payments start out lower than most other plans and increase every two years, for up to 10 years. Because early payments are lower and leave a higher balance that accrues more interest, you typically spend more money in repayment with this option than the standard repayment plan. These plans are usually best for those in lower income, entry-level jobs who anticipate a steady increase in income over time.

• Extended repayment plan – As its name implies, an extended plan allows you to make lower payments for up to 25 years. You may choose an extended repayment plan at a fixed or graduated amount. Though the monthly payments are lower than other plans, you spend more money overall as interest continuously accumulates over the length of repayment.

• Income-based repayment plan (IBR) – In most cases, you are eligible for IBR if the monthly payment amount of a 10-year standard repayment plan is higher than what an IBR plan would cost. With an IBR plan, the monthly repayment amounts are determined according to your adjusted gross income and family size. The annual amounts in these plans may fluctuate annually as income and family size changes. In some cases, monthly payments may be so low that they do not cover the full amount of interest that accrues each month, and the remaining interest is paid by the government for up to three years from the date repayment begins. Because these plans usually take longer to pay off (15-25 years) and hold a higher balance, you generally pay more interest on IBRs than other plans. However, if you meet certain requirements, remaining debt after 25 years of payments may be forgiven.

• Income-contingent repayment plan(ICR) – Like IBRs, ICRs calculate monthly repayment amounts in accordance with your adjusted gross income and family size, but there are small differences in the way they are calculated. Though ICRs closely resemble IBRs in general, they do have their differences. For instance, ICRs are only available under the Federal Direct Loan Program, whereas IBRs are available to anyone with federal student loans. Also, ICRs do not offer the same remaining interest forgiveness benefits that IBRs do. If you are considering IBRs or ICRs, it may be wise to further research how each type of plan may be better for your specific situation.

Consider Consolidation

If you are or will be making multiple payments for your federal loans, consider a direct consolidation loan to combine them. Consolidation loans may lower your monthly payment by extending your repayment period to 30 years. In addition, you may be offered alternative repayment options and the ability to change from a variable interest rate to a fixed interest rate.

Before consolidation, consider the downfalls. First, a lengthened repayment period also means paying more total interest and more total payments. Second, you may lose benefits that you received from the original loan, such as reduced interest and debt cancellation. Third, loan consolidation is irreversible, so the decision is final.

Decide Which Option is Best for You

If you can afford a standard repayment plan, it may be the best option, as you will pay off the loan quicker and pay less interest. If you project yourself struggling with the higher monthly payments that come with standard repayment plans, but are confident that your income will increase significantly in the future, consider a graduated repayment plan. If you aren’t certain about your future income level, it may be best to look into extended repayment plans, IBRs or ICRs.

In most cases, you will be placed on the standard repayment plan unless you contact your loan servicer to set up a different plan. It can be very beneficial to do so, as they will be able to help you sort through the pros and cons that may apply to your particular situation.

Take the first step toward achieving your goals.

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