There are several ways of repaying student loans. Each has its benefits for people in specific situations, so let’s explore the different types of repayment options.
I’m going to be using Citi’s repayment plans as a model (I have my loans through them and they do a great job of explaining the differences between the various options).
- Standard: This option means making monthly payments by making consistent payments. This is the only option for private loans. However, it is also the least expensive choice because you are not extending the term of the loan.
- Graduated: This plan means making smaller payments for the first few years and then making larger payments afterward. This is great for people who are starting their career because they can pay may as their income grows.
- Income-Sensitive: With this option, you pay what you can currently afford. The payments are either the monthly interest accrued or 1% of your gross monthly income, which is greater.
- Income-Based: People with a partial financial hardship (legally) may select this option. Payments are based on your income, family size, and the amount of debt you owe.
- Extended: Those who owe more than $30,000 in federal loans can reduce monthly payments significantly by spreading them out over a period of up to 25 years. Not surprisingly, this is the most expensive option in the long term. You can also refinance student loans if you’ve had a high rate and save a lot in interest payments
With most loans, there are no prepayement penalties. This means that with any of the above agreements, the payments are MINIMUM payments. You are allowed to make extra payments to pay down the balance of the loan, which helps reduce the amount of interest accrued as well as the length of repayment. An extra $300 now not only reduces the balance by $300, but also prevents you from having to pay interest on that $300 at any point in the future.
Loan Forgiveness Programs
There are also several loan forgiveness programs. There are different criteria to qualify for, but if you are willing to put in the time, you may be able to have a large portion of your student loans forgiven.
Here are the four ways to qualify for loan forgiveness:
- Perform Volunteer Work: AmeriCorps offers up to $4,725 to be used towards your loan after serving for 12 months, while Peace Corps offers cancellation of Perkins Loans (15% per year, up to 70%).
- Perform Military Service: Students in the Army National Guard are eligible for $10,000 of student loan repayment
- Teach or Practice Medicine in Certain Types of Communities: Students who become full-time teachers in an elementary or secondary school that serves students from low-income families can have 15% of their Perkins Loans forgiven in each of the first and second years of teaching, 20% in the third and fourth years, and 30% in the fifth.
In addition, Secondary school math and science teachers, and elementary/secondary school special education teachers who commit to working in high-need schools for five years can obtain up to $17,500 in Stafford loan forgiveness. They must teach full time for five consecutive years in a qualifying low-income school and be “highly qualified.”
- Meet Other Criteria: For those in legal and medical studies, Several US departments offer loan forgiveness. This includes the National Institute of Health, which repays up to $35,000 per year of student loan debt for students conducting clinical medical research.
Finally, while this is uncommon, borrowers may qualify for loan forgiveness after 25 years of active repayment.
As you can see, there are many options for repayment, and if you are willing to make a serious commitment, others will be willing to assist you in your repayment.
Now that we’ve covered the different types of student loans, tomorrow we’ll discuss the tax consequences of student loans.