While serving your student loan debt sentence, you’re likely searching for any and every way to ease the discomfort of burdensome monthly payments. Perhaps you’ve looked into some student loan repayment plans like income-driven repayment (IDR) programs, the most common option being the income-based repayment (IBR). (Find out more about IDRs)
Standard Repayment Plan
By default, federal loans start out on a 10-year Standard Repayment Plan that often result in a fairly high monthly payment. For example, if your income was $30,000 a year and your student loan debt totaled $34,722 with an interest rate of 3.900% your monthly payments would be $350. That can be tough for someone balancing rent/a mortgage, food and transportation costs. Your income – $30,000 Student Loan Debt – $34,722 Interest Rate – 3.900%
Under Standard Repayment Plan
Monthly Payment= $350 Total Amount Paid =$41,988 These high monthly payments are why recent grads on an entry-level salary, seek relief through an IBR or IDR plan. This allows their credit score to stay intact. Also give borrowers some additional money to live their lives. This may sound great to anyone really struggling, but in the long run it can really end up costing, almost double your original loan amount.
Income Based Repayment
Income based repayment reduces your monthly student loan payments by placing a cap on how much you’ll pay. No matter how much your income may increase, payments on IBR plans are capped at 10% of your discretionary income (if loan money was received after July 1, 2014) or 15% if you received loan money before July 1, 2014. IBRs require you to recertify every year; your monthly payments are likely going to increase over the course of your repayment term. If you get a raise or switch jobs to a higher salary, your monthly payments are going to jump up right along with it. Your income – $30,000 Student Loan Debt – $34,722 Interest Rate – 3.900%
Under Income-Based Repayment Plan
Monthly Payment= $98 Total Amount Paid =$48,523
The IBR “Forgiveness”
Most borrowers count on the remainder of their debt being forgiven after 25 years. However, understand that like laws do, there is a possibility that this can change. In addition, many borrowers don’t take into account the fact that it’s considered taxable income in the year of your release. Forgiveness comes with a price because you’re essentially trading student loan debt for a tax debt that’s due the same year you’re supposedly celebrating your student debt freedom.
How Income-Based Repayment really works
Without a doubt, income-based repayment is a successful method of lowering your monthly payments, but that’s about all it’s good for, unfortunately. Not only are you more than doubling the number of years you’ll be sitting on debt row, you’re also accruing interest on all those extra years. What’s worse – the interest is then capitalized, meaning it’s added to the principal balance of your loan and you end up paying even more interest on the higher balance – in most cases significantly more than the original amount you borrowed in the first place. Bottom line, if you’re struggling out of college to pay your loan and get on your feet, it may be a temporary solution for a year, or two. We’d never recommend IBR as your entire student loan payoff solution since most payments don’t even cover the interest being collected during that month.
Lower your monthly payments by refinancing
Refinancing your student loan debt is perhaps the most flexible way to manage your monthly payments. It allows you to consolidate your various loans into a single, easy-to-remember monthly payment, as well as choose whether you want a variable or fixed interest rate. You can even negotiate your repayment term for the optimal monthly payment. Refinancing with a reputable lender like Education Loan Finance enables you to significantly lower your monthly payments and lock yourself in for the duration of your term. Our customers have reported that they are saving an average of $309 every month and should see an average of $20,936 in total savings after refinancing their student loans with Education Loan Finance.* (Find more ways to Pay Off Student Loans Faster)
Refinance vs. Income-Based Repayment
On the surface, IBRs certainly seem like an enticing option, but it’s crucial to know the long-term consequences associated. If the only goal is to lower your monthly payment, IBR is not only capable of achieving the task-at-hand but also readily available for nearly all federal loan borrowers. Refinancing, on the other hand, is a much more intentional way of paying down student loan debt. It’s customizable for your budget and you can lock in your interest rate and know exactly how much you’ll pay every month for the life of your loan.
10 Facts About Student Loans That Will Save You Money
*Subject to credit approval. Terms and conditions apply. Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors. Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
