- There are different ways to pay back your loans. Figuring out which one works for you might save you some money.
- There are many different loan servicers. Find out which one is yours so you can reach out to them easily
- There are several useful tools, including a simulator. Take advantage of them so you can estimate what you will be paying.
It’s hard to graduate from college without some amount of student loan debt. So, if you’re like me, you’re trying to figure out what’s the best way to pay off your loans. Due to the pause on student loan repayment, I have had some time to research the topic and learn more about the process before having to make my first payment on May 1, 2022. Some people may decide to start to pay down their interest in their loans and pay through the pause but there are many that are choosing to just pause until May. Normally, you have to start paying your loans six months after graduating, however, the CARES (Coronavirus Aid, Relief and Economic Security) Act, along with an extension from the Biden Administration, have given students a bit of a breather.
The first step in getting yourself organized is to identify what types of loans you have (Federal or Private) and who the loan servicer is. While you’ll receive a billing statement or some other type of notice 21 days before your payment is due, use this pause to reach out to your loan servicer either online or by phone to get some information like an estimate of your payment amount. If you don’t know who your loan servicer is, log into “My Federal Student Aid” and remember, only your federal loans will appear on this site.
I have Federal student loans so I’m going to focus on what I’ve learned as I explored my options. One of the first things I learned is that there are two categories of repayment plans with different options in each plan. The two types of plans are: Time-based and Income-based.
The Time-Based Repayment plan allows you to pick from a 10-year or a 25-year repayment plan with a fixed interest rate for the life of the loan. The 10-year plan will allow you to pay back the least amount of money due to a shorter time span (less paid in interest) than others. The 25-year plan allows you to spread out your repayment so you are not in a financial bind while trying to pay off your loans. But with the 25-year plan, you will end up paying more in interest over time.
The next option is an Income-Based Repayment plan. These plans will be based off of how much you make annually and how big your family size is. Payments will change as your circumstances change so you must recertify every year. This is because they expect that your income will increase by at least a small amount every year. The two most popular Income-Based repayment methods are Pay as you Earn (PAYE) and Revised Pay as you Earn (REPAYE). The regular Pay as you Earn will cap your monthly payments at 10% of your monthly income. This will make sure that you still have a livable income while you are paying off your loans. With a regular Pay as you Earn you will also never be paying more than the 10-year standard repayment. The next method is the Revised Pay as you Earn. This is for people that don’t qualify for the regular Pay as you Earn because they are not “new” borrowers so anyone who has gone to school in the past and taken out loans will not qualify for Pay as you Earn. Unlike the regular plan, the Revised PAYE can take more than the 10 years pay off plan. These two are very similar but different in those aforementioned ways.
In my case, I chose to apply for the regular Pay as you Earn. This will allow my payments to remain at a level where I am able to pay back my loans in a timely manner while leaving me with enough to live on. It is important to remember as you’re picking a plan to take into consideration, what your interest rates are, and what your income will likely be in the future. There are several tools available to you and one that I’d highly recommend is the use of a Loan Simulator. You can find one on https://studentaid.gov/loan-simulator/. Before you log on, be sure to know what your outstanding balances are and what your interest rate will be. Those are two inputs needed to run the analysis and, thus, take the surprise out of what your estimated payment will be.
The simulator really helped me balance what I could afford for a monthly payment with my desire to pay off my loan as soon as possible. Eventually, with the help of the simulator, I arrived at a place that made sense for me. I hope that you too, armed with this information, resources and the loan simulator will find the best method for you. Remember, stay calm, stay open and discover how you can balance your financial commitments.