Student Loan Repayment Guide: 5 Tips You Should Know

Five Strategies for Student Loan Repayment

Trading textbooks for briefcases shouldn't mean trading excitement for anxiety about debt. From budgeting tips to finding ways to increase your income, here are some actionable strategies to help you pay off your student loans faster than you might think possible.

1. Adjusting Your Budget

Navigating the financial realities of a post-COVID world requires a two-pronged approach: adjusting your budget for student loan repayments and building an emergency fund. With loan payments resuming, it's crucial to revise your spending plan to incorporating tracking expenses, prioritizing essentials, and allocating a designated portion of your income towards repayment.

The pandemic served as a stark reminder of the importance of financial preparedness, highlighting the need for an emergency fund that can cover 3-6 months of living expenses. By adopting these strategies, you can build financial resilience and navigate your financial future with greater confidence.

2. Understanding Student Loan Interest Rates

Understanding the intricacies of interest rates is crucial in managing your loans. We'll break down the difference between fixed and variable rates, how interest accrues, and its impact on your monthly payments. This knowledge is key to choosing the right repayment plan that aligns with your financial goals.

Fixed Interest Rates:

• A fixed interest rate remains constant throughout the life of the loan.
• Your monthly payments remain consistent and predictable.
• Provide stability and protection against interest rate fluctuations.
• Easier to budget for, as you know exactly how much you’ll pay each month.
• Typically, higher initially than variable rates. However, this can be advantageous if interest rates rise.
• More common for student loans

Variable Interest rates:

• A variable interest rate can change over time based on market conditions.
• Monthly payments may fluctuate, making budgeting more challenging.
• Often starts lower than fixed rates, potentially resulting in lower initial payments.
• Exposure to interest rate fluctuations can lead to higher payments if rates rise.
• Can be beneficial if interest rates remain low or decrease during the loan term.
• Less common for student loans

One way to envision the difference is to think of the financial landscape like driving across the country. Fixed interest rates are like cruising on a steady, predictable highway – the cost (your interest payments) stays the same, mile after mile. Adjustable rates, however, are more like a scenic coastal route – the views may be stunning, but the price at the pump (your interest) can fluctuate wildly depending on external factors.

Ultimately, choosing between fixed and adjustable rates depends on your financial tolerance for the open road. If you crave stability and predictability, stick to the fixed-rate highway. But if you're a savvy navigator willing to trade potential savings for a touch of uncertainty, the adjustable-rate coastal route might be your perfect adventure.

3. Know Your Repayment Options

Timely repayments can not only keep you out of default but also improve your credit score.  While navigating the maze of repayment options can feel overwhelming, it doesn't have to be. Let’s explore the options so you can decide on the best for your situation.

Standard Repayment Plan:

• Features: This plan involves fixed monthly payments with a term usually up to 10 years. It's designed to pay off the loan in the shortest time with the least amount of interest.
• Best For: Those who can afford higher monthly payments and want to minimize interest costs over the life of the loan.

Graduated Repayment Plan

• Features: Payments start lower and increase every two years. The repayment term is usually up to 10 years. This plan accounts for the likelihood of income growth over time.
• Best For: Ideal for borrowers who expect their income to increase steadily over time but need initial relief in payments.

Extended Repayment Plan

• Features: This plan extends the loan term up to 25 years with either fixed or graduated payments.
• Best For: Suitable for borrowers with more substantial loan balances looking to reduce their monthly payment amount, though it results in more interest paid overtime.

Income-Driven Repayment Plans

• Income-Based Repayment (IBR): Monthly payments are generally 10-15% of your discretionary income, recalculated each year based on income and family size. The repayment period is typically 20-25 years.
• Pay As You Earn (PAYE) and Saving on a Valuable Education (SAVE - formerly known as REPAYE): These plans usually cap payments at 10% of discretionary income. PAYE has a 20-year term, while SAVE can extend to 25 years for graduate loans.
• Income-Contingent Repayment (ICR): Payments are recalculated each year based on income, family size, and total amount of your Direct Loans. The repayment term is up to 25 years.
• Best For: Ideal for borrowers with lower income or substantial debt relative to income. These plans can lead to loan forgiveness after 20-25 years but may result in more interest paid over the life of the loan.

Public Service Loan Forgiveness (PSLF) Program:

• Features: Specifically for borrowers employed in public service jobs. After making 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer, the remaining balance on your Direct Loans can be forgiven.
• Best For: Those committed to long-term careers in public service sectors.

Private Loan Repayment Options:

• Features: Terms and options vary significantly among private lenders. Some offer fixed, variable, or graduated repayment options, and terms can range widely.
• Best For: Depends on the lender's terms and the borrower's financial situation. Often lacks the flexibility and benefits of federal loan repayment plans.

4. Trimming Down Your Loan Debt 

Making extra payments, no matter how small, can significantly reduce your total debt over time. Biweekly payments can reduce your interest accrual. Here are some smart strategies to trim down your loan debt.

• Make extra payments toward the principal: Making additional small payments against toward the loan principal can lead to big savings over the life of the loan. For example, making just $50 in extra payments each month on a $20,000 loan with a 5% interest rate, can save you over $1,500 in total payments and shorten your repayment term by 6 months!
• Make biweekly payments: Biweekly payments can lead to one extra full payment per year, subtly shortening the repayment period and reducing interest.
• Refinance if you have good credit and a steady job: Securing a loan with a lower interest rate through refinancing can be a game-changer.
• Enroll in autopay: Some lenders offer a slight interest rate reduction when you opt for autopay — plus, it ensures you never miss a payment.
• Pay off capitalized interest: Targeting any capitalized interest first can prevent it from adding to your principal balance.

5. Loan Forgiveness and Assistance Programs

For those in public service, education, or certain other fields, loan forgiveness programs can be a lifeline. If you work in one of these fields, be sure to visit the Department of Education’s Federal Student Aid website to learn more about eligibility and ways to qualify for student loan forgiveness.

Student Loans FAQs

What impact do student loans have on my credit score?

Student loans can play a significant role in shaping your credit score, both positively and negatively. It's all about how you manage your repayments and the information lenders report to credit bureaus.

On the positive side, on-time student loan payments can build your credit score by establishing history, diversifying your credit mix, and lengthening your credit age. Conversely, late payments, having a high credit utilization rate (how much of your available credit you're currently using), can negatively impact your credit score, severely limiting your future borrowing power. 

What happens with missed payments on student loans?

Missing payments could lead to negative credit reporting, additional interest, and late fees. That’s why it’s essential to create a budget that accounts for student loan payments. 

How can I get rid of my student loans?

The path to clearing student loan debt isn't always a straight line, but there are forgiveness options if you qualify. For federal student loans, there are forgiveness programs available after you make payments and meet other qualifications.  Learn more at Studentaid.gov

Tackling student loans in a post-pandemic world might seem daunting, but you're not alone. This guide has equipped you with the knowledge and strategies to build resilience, make informed choices, and chip away at your debt. Remember, every small step counts. With dedication and these tools as your compass, you can navigate the path towards financial freedom.

RISE understands the overwhelming feeling of managing student loan repayments and the financial stress it can cause, and we're here to help you start your journey towards a brighter financial future. RISEcredit.com offers helpful financial wellness tools like free credit monitoring, as well as budgeting, savings, and debt management tools. If you’re in the market for a loan, or just want to learn more about RISE, visit risecredit.com today.

This content provided is for educational and informational purposes only and does not constitute financial or legal advice. RISE is not acting as a credit counseling or repair service, debt consolidation service, or credit services organization in providing this content. RISE makes no representation about the reliability or suitability of the information provided – any action you take based on this content is at your own risk.