Options for Paying Back Your Student Loans

The amount of outstanding student loan debt has surpassed that of credit card debt for the first time in history. Studies predict the amount of student debt could pass $1 trillion this year. Student loan borrowers all over the country are crushed by student loan debt.

What makes student loans more burdensome than other types of debt is that it’s nearly impossible to have the debt discharged in bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, requires borrowers to show that paying back the student loan would cause “undue hardship.” While the law doesn’t say this specifically, it’s been understood that you’d almost have to be incapacitated with no income to have your loans discharged. The law applies to both federal and private student loans.

If you’re struggling to repay your student loans, your best hope is that the lender has a repayment plan that would make your monthly payment more affordable. The following repayments plans are typically offered.

Standard Repayment: On the standard repayment plan, you’ll pay a fixed amount for up to 10 years. The monthly payment on the standard repayment plan is usually the highest since the repayment period is the shortest. However, you’ll also pay the least amount of interest since you pay your loan off quicker.

Extended Repayment lets you pay the loan off in as many as 30 years. By extending your repayment period, you can lower your monthly payment. However, you’ll also end up payment much more interest than if you had a shorter repayment period. If you’re struggling to make payments in the short-term, you might choose this option to reduce your monthly payment. Then, you can make bigger payments later as you can afford to.

Graduated Repayment allows you to make lower payments in the first two to four years of the loan. Then, the payments increase gradually over the remainder of the repayment period.

Income-Contingent Repayment is available for students who’ve borrowed a Direct Loan. Under this plan, monthly payments are based on your and your spouse’s income, family size, and your student loan balance. The payment amount adjusts each year based on income. At the end of 25 years, any outstanding balance is cancelled.

Income-Based Repayment is available for other types of federal student loans. The monthly payment amount is calculated based on income and family size. But, to qualify for the program, the monthly IBR repayment must be lower than the payment you would make if you were on the standard repayment plan. Like the Income-Continent Repayment plan, remaining loan balance is cancelled at 25 years.

Note that income-based repayment plans typically aren’t available for private student loans.

Deferment and Forbearance

Under certain circumstances, you may be able to defer your loan payments for a period of time. While in deferment, your loan payments are suspended. If you have a subsidized loan, interest won’t accrue.

Most lenders defer payments if you’ve reenrolled in a qualified institution for more than half-time. You may be able to defer federal student loan payments if you’re having financial troubles. For recent college graduates or those who’ve recently dropped below half-time, there’s typically a six-month grace period before payment begins.

In forbearance, your payments can be temporarily postponed or reduced. Interest will accrue on your loans while they’re in forbearance. If you don’t cover the interest, it will capitalize – be added onto your loan balance, increasing the amount you owe.

If you’re struggling to make your payments, contact your lender to see which options are available for you. Extending your repayment period may make your payments more affordable. However, deferment or forbearance may be the only options when you simply cannot afford payments right now.

Sources: Time.com, U.S. Department of Education