When you first repay your federal student loan, you either selected a repayment plan or you were assigned one. You can always change your plan, although there are certain key times that you may want to rethink your repayment strategy.
Choosing an amortization plan
Federal student loan borrowers can choose from several different repayment plans depending on income levels and other circumstances such as family size. You can change your repayment schedule as often as needed. However, keep in mind that any change will likely affect the total amount that you are expected to repay.
The usual repayment period for federal student loans is 10 years. Standard amortization is usually the fastest way to pay back, which means you’ll pay less interest and save money over time.
However, if you’re struggling to make your monthly payments under the standard amortization plan, you can consider options like a staggered repayment, an extended repayment, or an income-based repayment. These plans sometimes extend your repayment deadline and make you pay more over time, but you may get a more manageable monthly payment in the short term.
When you’re thinking about which amortization plan is right for you, you can use the Department of Education’s new loan simulator tool to see what plans you might be eligible and get estimates of how much you would pay monthly and overall . You can also speak to your student loan servicer – the organization that collects monthly loan payments and manages student loan accounts on behalf of the federal government – to review your options.
Factors to Consider
If you work for a qualified government or nonprofit organization and want to apply for a public service loan, you must make 120 qualified payments on an approved repayment schedule. For approved repayment plans, speak to your servicer or visit the Department of Education website.
Once you’ve signed up for a qualifying plan and making progress towards loan waiver, you don’t want to change your plan or risk being ineligible. If you’re not sure you’re on the right plan, speak to your student loan service provider.
Another detail to note is that when you switch repayment schedules, any outstanding interest that has accrued can be capitalized. This means that interest that adds up and has not been paid will be added to your loan balance, increasing the amount you owe. This is a particular problem for borrowers switching from an income-oriented repayment plan, as the monthly payments on these plans can be so low that you may have accrued a significant amount of unpaid interest.
Finally, to sign up for an income-based repayment plan, you need to apply to your student loan intermediary or StudentAid.gov. If you sign up for this type of plan, you will need to reapply each year and provide updated information on income and family size. If you miss the recertification deadline, you will usually be automatically placed on standard repayment and your interest will be capitalized. If you have any questions about this process, contact your student loan service provider.
When to rethink your repayment plan
You can reconsider your student loan repayment schedule at any time, but it can be beneficial to consider yourself at certain key times that you are on the right plan.
Struggling to repay. If you are struggling to make your monthly payment, you should contact your student loan service provider as soon as possible to discuss your options. Your servicer can help you find the right plan to avoid defaulting or defaulting on your loan, which can seriously affect your creditworthiness and affect your creditworthiness in the future.
Find the best lenders for student loans
New job or raise. If you have a plan other than standard amortization, a new job or a raise is a good time to rethink your repayment strategy. You should check to see if your financial situation has improved enough to allow you to afford higher monthly payments and if you can save money by repaying your loan faster.
You should consider how much you have left to pay, how much interest you accrued, and how much your monthly payments would increase. You can ask your student loan service provider for a repayment schedule to see your options in detail.
Important life events. Buying a home, getting married, adding to your family, or the thought of retiring can all have a drastic impact on your monthly budget. Big life events like these are a good time to make a more general assessment of your finances and to reflect on your financial health.
For example, you can check how much you have in savings and how your monthly expenses might change in the future. Knowing that a big change is coming, now is a good time to ask yourself whether you can save money by paying more each month, or whether you might have to cut your monthly payments to cover new expenses.
Go back to school. If you choose to go back to school at least half the time, your loans will be automatically deferred. You will not have to make any monthly payments during this time, but interest may still be charged on some of your loans.
Especially if you are planning on taking on more debt for your courses, consider whether you can afford to keep paying part of it while you are in school and how much you will owe after you graduate. A good rule of thumb is to make monthly payments that equal the accrued interest you will pay each month.
As you take on more debt, it may increase the amount you have to pay each month after you repay it. Therefore, now is a good time to start thinking about how you plan to manage that payment along with other monthly expenses.
For example, if you don’t want to change your repayment schedule, you can always repay your student loans early with no penalties with extra money from your job or cash gifts, which means your loans are paid off faster.
In general, it makes sense to take stock of your finances at least once a year. At least every few years you should consider whether you are still on the right repayment plan for the student loan. These are some great times to do that.
