How to Repay Your Student Loans (Financing Your Education 3/4)


Meet Zoe. Zoe just graduated from college
and got her first job at Corporate Co. After six months of hard work, Zoe has just
received her first promotion. She’s very excited and looks forward to upgrading her
lifestyle a bit. However, there’s just one problem. Because
Zoe is now six months out of college, payments on her $10,000 worth of subsidized Stafford
loans have just begun. What should she do? Well, her first step is simple. Get a refresher
on loans by watching our three videos “Loans 101”, “Loans: Mistakes and Best Practices”
and “Student Loans 101”. Then, assuming that’s done, Zoe should log
on into the National Student Loan Data System, which will give her a detailed overview of
each one of her federal student loans, including their payment status and their loan servicer. Finally, now that Zoe is all refreshed on
her student loans, her last step is simple: understand the payment options available to
her. By default, most student loans are placed
under the Standard Repayment Plan, which just means Zoe will pay off her loans with a fixed
monthly payment over a ten year term. However, this amount may be too much for many
people, especially right out of college. If this is the case, Zoe can easily switch repayment
plans by contacting her loan servicer, who will then walk her through the three alternative
options. Option One: The Graduated Repayment Plan.
Like the Standard Plan, it has a ten year term. However, rather than paying a fixed
amount over a ten year term, monthly payments start out small and then gradually increase,
giving you a gentler introduction to your loan payments, at the expense of slightly
higher interest. Option Two: The Extended Repayment Plan. Under
this plan, payments are much lower and can be made up to 25 years post-graduation. Because
of this delay, this plan may be valuable to some people, but it comes with a cost, lower
monthly payments will lead to more interest paid in the long-run. Option Three: Income Based Repayment. Under
an IBR plan, your monthly payment cannot exceed more than 10% on your discretionary income.
Plus, payments can be made for up to 20 years post-graduation, and any debt still remaining
at that point will be forgiven, unless you work in the public or nonprofit sector, in
which case only 10 is required. While this is all great, there are two major
caveats: One: Not everyone will qualify, as your monthly
payments under an IBR plan must be lower than they would be under a standard plan.
Two: Under an IBR plan, interest will continues to accrue on the money you borrowed, even
if your monthly payments go to zero. This can make IBR plans incredibly expensive in
the long run. So that’s the three alternatives. Honestly,
Zoe is overwhelmed. How can she choose between so many options? Well, we recommend using the studentloans.gov
payment estimator, which will calculate the monthly payment of her loans under each plan,
and then make it easy to compare them. However, what happens when comparing just
isn’t enough, when your payments have just become unmanageable and you can’t do an
IBR plan? Well, luckily for Zoe, there is a solution
to this problem, deferment or forbearance. These are periods of time during which your
student loan payments can be reduced, or even suspended. The first, deferment, is harder to qualify
for and requires very specific conditions, most prominently unemployment, a return to
school, or military service. In contrast, the second, forbearance, is much
easier to qualify for, as it only requires Zoe to have a financial hardship or illness.
However, be warned, under forbearance, interest payments are not suspended, whereas they can
be under deferment. If you’re interested in either option, be
sure to contact your loan servicer for more details. Hopefully you and Zoe now have a better understanding
of how to repay your student loans. Be sure to watch our next video, where you’ll learn
more about student loan refinancing, and be sure to check out our website, where you can
find outside scholarships, private student loans, and more educational content.

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