Once upon a time, paying back student loans was a cut and dry 10-year plan. It’s still an option, but not the only one. And thank the money gods for that! As the cost of higher education swells into the stratosphere, most of us cannot realistically keep up with that kind of monthly payment.
There is now an assortment of flexible repayment options (primarily for federal loans) to help you manage your student loan debt. Let’s break it down…
When the basics will do, choose…
…a standard repayment plan, meaning you’ll pay a fixed amount each month for a term of ten years.
…a graduated repayment plan, meaning that your payments will start out low in the early years, then gradually increase through the end of the term.
…an extended repayment plan, which stretches out the time you have to repay your loan, sometimes up to 30 years. But keep in mind that this will require you to pay significantly more interest over the life of the loan.
When you need more options…
Income-Based Repayment (IBR) plan: Here, your monthly loan payment will be based on your annual income. As your income fluctuates up or down, so do your payments.
Loan consolidation: Though technically not a repayment option, this will allow you to combine several student loans into one consolidated loan with a lower interest rate.
When life gets seriously complicated, file for…
…a deferment wherein your lender grants you a temporary reprieve from repaying your student loan based on specific conditions, such as unemployment, temporary disability, military service, or a return to graduate school on a full-time basis.
…forbearance wherein your lender grants you permission to reduce or stop your loan payments for a certain period of time due to hardship.
…cancellation, which is not easy. Bankruptcy laws only allow your loan to be wiped off your financial slate due to something calamitous (like death or permanent total disability).
…altruistic programs: Federal loans may also be cancelled via participation in altruistic programs like teaching needy populations in certain geographic areas.
Now That You’ve Figured Out Repayment…Let’s Talk Management
A student loan is a major debt and it needs to be managed like one. To be successful at it (that is, pay it off as quickly and efficiently as possible) there are two important rules to follow:
1. Track it, because you own it. Add ‘student loan payoff’ to your list of goals and treat it accordingly by writing it into your budget and adjusting your payoff schedule, as needed. It’s also essential that you keep your records current and in one place.
2. Remember: You own it. Not the other way around. It’s even more essential to stay on top of what you can manage at any given time, and touch base with your lender when circumstances change. That means…
…pulling the emergency cord (i.e., deferment or forbearance) when your situation dictates it.
…filling out the appropriate application and supporting documentation.
…following up to make sure that your application has been processed correctly.
The Silver Lining Payback
There is good news to report when it comes to paying back student loans.
- You might be able to deduct some of the student loan interest you’ve paid over the course of the year from your annual federal income tax return. Come tax time, keep an eye out for the Form 1098-E to see if your loan payments qualify.
- And guess what? You can exercise even more options in the form of financing alternatives.
Given all of your options, keep in mind that the one you choose will depend on your particular situation, and you should discuss these options with someone you trust or a financial adviser, like a CPA.