Student loans are a significant issue in any modern economy, especially in the US. With so many student loan debtors getting financially unstable, paying your student loans on time is crucial. We are going to look at five simple ways of paying federal student loans.
In this free guide, we will answer the frequently asked questions regarding federal student loan payments. These questions are;
- What are the best methods of paying federal student loans?
- How many years do you have to pay off federal student loans?
- What is a grace period in federal student loans?
- Can you pay back Stafford loans early without penalty?
This guide is only applicable to federal student loans. So if you have private student loans, you might want to check other resources. With that out of the way, let’s explore the various methods you can use to pay off your federal student loans.
What are the best methods of paying federal student loans?
There are several ways of paying your federal student loans. Depending on your situation, some ways could be a better option than others. But the best way to pay off your federal student loan is to pay more than the minimum required amount every month. Paying more means you will owe less interest, and you could be student-debt-free before you know it.
Yes, I know not everyone is privileged enough to pay extra every month. So, here are other options you could consider which best suits your situation.
1. Automatic deductions:
Immediately you start working, contact your loan servicer and authorize them to debit your student loan payments from your account automatically. These automatic deductions ensure that you don’t miss out on payments, and your credit score will be improved with on-time payments.
You could even benefit from a lower interest rate since your loan servicer will consider you as a low-risk debtor. If you don’t know your loan servicer, you can contact the Federal Student Aid Center (FSAC) at 1-800-433-3243 or visit their official website https://studentaid.gov/ to request your loan servicer’s information.
If you have a good-paying job, you can also set a higher automatic deduction than the minimum required monthly payments. But make sure the deductible amount is from your discretionary income.
So what if you don’t have a high-paying job that could enable you to make more significant monthly payments? In that case, you can use the standard repayment plans.
2. Use the Standard Repayment Plan:
Stick to the standard repayment plan if you can’t make more significant monthly payments due to a lower discretionary income. Automatically, federal student loans have a repayment timeline of 10 years set by the government. So the easiest and fastest way for not defaulting is to stick to the standard repayment plan.
All federal student loan types are eligible for the standard repayment plan. With this plan, you will pay less interest over time than with other payment plans. But if you are seeking a Public Service Loan Forgiveness (PSLF), the Standard Repayment Plan might not be suitable for you.
According to Federal Student Aid, you won’t qualify for PSLF if you are under the Standard Repayment Plan for Consolidation Loans.
3. Use your Tax Refunds.
Since you get taxed more than you should in most cases, you can easily file for a tax refund every year. You could get more than a $2000 tax refund which you can use to make a sizeable student loan payment.
I know it might be tempting to use some of that tax refund money to buy other things. But if you are serious about getting out of student debt, you should use the entire tax refund to pay part of your federal student debt. Making this sizeable payment at once will lower your interest rates since a chunk of that payment will go straight to the principal amount and not the interest.
4. Use Your Newly-Found Money:
From time to time, we all get surprises from friends, family members, colleagues, our job, or even by nature. You might receive gifts on your birthday, wedding day or even come into possession of a surprising amount of money.
Don’t feel terrible selling these gifts to make a significant payment to your federal student loan. It would be best if you always put your feelings first to get out of student debt. So if you receive a Rolex watch or expensive jewelry as a gift, don’t hesitate to sell for your student loan payments.
You can always get more gifts in the future. But if you don’t pay off your federal student loans on time, the consequences are damaging.
5. Student Loan Refinance:
Student loan refinancing can help you in replacing multiple federal student loans you have without making extra payments. Refinance is best if you have multiple student loans with different interest rates. These loans can get very expensive over time in terms of interest rates, and they are also challenging to manage.
But with student loan refinance, you only have to worry about a single interest rate and a single loan servicer to pay your student loans. In addition, refinancing your student loan can lower your interest rates by over 35%.
Below are some reliable and low-interest student loan refinancing companies. Check the rates to see which one is suitable for you if you decide on refinancing your student loan.
Student Loan Refinance Table
How many years do you have to pay off federal student loans?
Federal student loans have a 10 to 30 years payment period depending on the repayment plan you choose. There are around seven main federal student loan repayment plans. Each of these plans has a limited period in which you must repay your federal student loans in full to avoid default.
These plans and their limited repayment periods are;
1. Standard Repayment Plan:
This plan is eligible for all borrowers, and the repayment period is limited to 10 years. If you consolidate your federal student loans, the timeline moves up to 30 years.
2. Extended Repayment Plan:
This plan has an extended timeline of no more than 25 years. If you are a direct borrower, your outstanding Federal student loan must be more than $30,000. This plan is also eligible for all borrowers except if your outstanding direct loan is lesser than $30,000.
3. REPAYE – Revised Pay As You Earn Repayment Plan:
The timeline for this loan is 20 years for undergraduate studies and 25 years for studies. If you commit to the monthly payments and never defaulted, any outstanding balance will be forgiven.
4. PAYE – Pay As You Earn Repayment Plan:
The repayment timeline for this plan is 20 years. With this plan, you pay 10% of your discretionary income. The payments are recalculated every year in case your income gets an update. Like the REPAYE plan, any outstanding balance after 20 years will be forgiven.
5. IBR – Income-Based Repayment Plan:
The repayment timeline with this plan is around 25 years. Your monthly payments are set at 10% or 15% of your discretionary income, depending on when you took your first loan. Your payments are calculated each year depending on any update on your salary.
6. ICR – Income-Contingent Repayment Plan:
With the ICR, you pay 20% of your discretionary income or any amount you would pay on a fixed payment repayment plan over a 12year period. If you haven’t paid the amount in full after 25 years, the balance will be forgiven.
7. Income-Sensitive Repayment Plan:
This repayment plan is only available for FFEL(Federal Family Education Loan) program, and it is not eligible for PSLF(Public service Loan Forgiveness). With this repayment plan, your loan has to be paid in full within 15 years, although it is based on your annual income.
For more details on finding your federal student loan repayment plan, check this free resource on the Federal Student Aid website about repayment plans.
What is a grace period in federal student loans?
With most federal student loans, you have a period of six months after graduation, drop-out, or drop below half the time of enrollment before you start paying your loan. This six-month period is what is called the Federal Student Loans Grace Period.
During these six months, you should try and get yourself financially stable and select the repayment plan that’s best for you. But what if your grace period is affected?
Let’s say you get called into active military duty during the last 65 days of your grace period. In this case, these 65 days will be paused. Your loan servicer will resume counting when you are back from active duty.
Can you pay back Stafford loans early without penalty?
Unlike some private student loans, early payments of federal student loans have no prepayment penalties. You can make extra payments on your federal student loans without paying penalties. If you pay early or more, a huge chunk of the payment goes into your principal balance than into the interest.
But if you are paying extra or early, address a letter to your loan servicer to add the excess payments on your unpaid principal balance. This way, your interest rates get reduced, and you could become debt-free early.
Bottom-Line
Paying federal student loans can be overwhelming and stressful to manage. But you have nothing to worry about because you can use one of the methods covered in this article or speak to a student loan attorney.
