As graduation day rolls around, you’re probably thinking about a lot of different things – the excitement of finally earning that diploma, celebrating with friends and family and saying goodbye to professors and classmates. Preparing to repay your student loans is yet another important item to consider. You’ll most likely have a six-month grace period from the time you graduate until you start making payments, so plan to use that time to learn more about your repayment options and to begin budgeting for monthly payments.
Paying off your federal loans – your repayment checklist
To find out repayment options for your private student loans, contact your lender.
- Choose the repayment plan that’s right for you. When you start paying your student loans, it’s important to choose the repayment plan that best meets your needs. If you don’t choose a plan, you’ll automatically be placed on the Standard Repayment Plan, which will help you pay off your loans after 10 years. Use the Repayment Estimator to compare your monthly payment options. You can opt for lower monthly payments through an income-driven repayment (IDR) plan. With an IDR plan, depending upon your income and family size, your payment could be as low as $0 per month.
- See if your career choice will qualify you for loan forgiveness. If you’re employed with the government or a non-profit organization, you may be eligible for the Public Service Loan Forgiveness (PSLF) Program. With this program, your loans will be forgiven after 10 years of federal student loan payments. If you teach at a low-income school or educational service agency, your loans could be forgiven after five years of service through the Teacher Loan Forgiveness Program.
- Know your loan servicer and their payment policies. When you start to make payments on your loans, you won’t pay the U.S. Department of Education directly. Instead, you’ll be making payments to your student loan servicer. Keep your loan servicer’s contact information handy – after all, they are your best resource for answering your student loan questions. To locate the name of your servicer, log on to the Student Aid website with your FSA ID.
- Weigh the pros and cons of consolidation. If you are using more than one loan servicer, consolidation can help simplify the repayment process. By bundling several loans into one, it may even help you qualify for better repayment options. Read on for more information about loan consolidation and how it differs depending on the types of loans you have.
Know the difference: Refinancing vs. consolidation
Refinancing and consolidation are two terms that are frequently confused in the world of student loan repayment. Both processes let you bundle several loans into one, but there are a few key differences that could majorly impact your repayment plan.
Federal consolidation is completed through the government and combines all your federal loans under one servicer. Your new interest rate is the average of the individual interest rates, rounded to the nearest 0.125 percent. Only federal loans are eligible for federal consolidation, but this process can simplify payments if you have multiple servicers or if you want to qualify for certain repayment programs. A major drawback of federal consolidation is the extension of your loan term, resulting in up to 20 years of additional interest payments.
Refinancing, or private consolidation
Refinancing is completed through your personal banker or a refinancing agency and exchanges your existing loans for a new loan, with terms based on your financial history. Both federal and private loans may be eligible for refinancing; however, applicants may be subject to a credit check along with a debt-to-income analysis. Refinancing can save you money on the overall cost of the loan and reduce your monthly payments.
Cost of confusion
If you accidentally refinance your loans instead of consolidating, you may lose federal borrower protections, such as loan forgiveness and income-driven repayment. Without these protections, your repayment options could become limited, running the risk of increasing your long-term costs.
On the other hand, accidentally consolidating may not give you the lower interest rate or shorter loan term you could get by refinancing. In fact, consolidation may increase your overall interest rate and could extend your loan term up to 30 years.
Whatever repayment plan you decide on, be sure you know the difference between federal consolidation and refinancing. Both processes can help you cut costs on loan repayment, but it all depends on how much you owe and what repayment plan you sign up for. The best policy when it comes to repayment? Weigh the benefits and drawbacks of each process before you decide which repayment plan is right for you.