In the United States, more than $1.6 trillion in student loan debt is owed by 45 million Americans. The average monthly payment ranges from $200 – $300. Also, the average amount a person owes is $30 thousand, according to Prudential.
When you’re trying to create a strategy to pay off your student loans, Gardine Wilson, a Prudential financial professional, says it’s best to examine three things. “You need to know the type of loan you have. What your repayment options are and what your payoff strategy is,” said Wilson.
Types of Loans
Federal loans are funded by the federal government. Typically, there are ten servicing agencies that service the loans. They usually have low, fixed interest rates and offer flexible payment options and forgiveness programs. If you’re in college, the interest is not accruing.
Private loans are funded by banks, credit unions, and state agencies. The repayment options depend on the lender and the terms of the agreement. The interest accrues while you’re in school.
The standard repayment plan is the one that will help you pay off the loan the fastest. You will have the least amount of lifetime interest compared to other options. However, you will have higher payments compared to the other options.
With the graduated repayment plan, the repayment period is at ten years. Your payments start out low and increase every two years. You may have more lifetime interest on the loan compared to the standard repayment plan.
For the extended repayment plan, you can set it up to 25 years at a flat amount (fixed plan) or you can have it placed on a graduated repayment plan. A new borrower with over $30 thousand in outstanding direct loans is generally eligible for this. You will pay more over time in this plan than the standard repayment plan.
The income-driven repayment plan is based on a percentage of your income. The repayment period can be 20 – 25 years. All direct loan borrowers are eligible for this repayment plan. The payments are based on your discretionary income and family size.
There are four types of income-driven repayment plans: pay as you earn (PAYE), revised pay as you earn (REPAYE), income-based repayment plan (IBR) and income-contingent repayment plan.