Student Loan Debt: Budgeting and Repayment

In response to the economic instability caused by the pandemic, eligible federal student loan payments were paused in March 2020 providing relief to individuals with student loan debt. The pause on payments will come to an end this fall, and federal student loans will start accruing interest on September 1 with payments resuming in October according to the Department of Education. If you have federal student loan debt, being proactive by taking a look at your budget and repayment options will help you stay on track. 

Whether you're already making student loan payments or you're one of the millions of Americans preparing to make payments again, it's important to determine how your student loan payment fits into your budget. Now is a good time to take a look at your budget and repayment plan so you're prepared when payments resume in the fall. To help, we've put together information to prepare your budget and to provide you with an overview of the repayment options that are available. 

BUDGET

Before you start repaying your student loans, you should evaluate your budget:

First, review your income:

Establish a total of all the money you have coming in (after taxes). Include any additional income besides your salary or paycheck. That may include child support, commissions, or any passive income (unearned income such as interest on savings, cash back or rewards from a credit card, income from a rental property, etc.).

Second, factor in your expenses:

List the money you have going out. Start with the necessities: food, housing, utilities, and transportation. Now list the other expenses like childcare, insurance, subscriptions, and other debts. Here is where you will list your student loan monthly payment. Make sure to include all of your expenses. You can also include money you set aside each month to save (think of it as paying yourself).

Third, subtract your expenses from your income:

If you've accounted for all of your expenses, you will likely end up at zero. This type of budgeting is called “zero-based budgeting." It is a framework that assigns a job to every dollar you bring home. All expenses must be justified. If you end up with a positive number, that's extra money you can apply to your student loans.

If you came up with a negative number, you should find areas to reduce spending. Simple adjustments can get you back on track. Try generic items, buying in bulk, meal prepping, packing lunch, taking extra shifts at work, or reducing streaming subscriptions. It may seem like a lot to give up, but the trade-off is being able to reduce your debt.

If that still seems unattainable, a few options may help. You can contact your loan servicer, explain your situation, and arrange a more affordable payment. Loan consolidation is also a popular option. This combines multiple loans into a single loan that could save money, reduce your monthly payment, or both. Federal loans can be consolidated through the Department of Education. Consolidation does not lower your interest rate, but it can extend your terms, lowering your monthly payment. There is also the possibility of extending your “honeymoon” period (typically the six months after graduation before you have to start making student loan payments) by asking for a deferment or forbearance. A deferment is a temporary postponement of payment under certain conditions. Forbearance is when your monthly payments are temporarily suspended or reduced. You can also do your research to see if you're eligible for any student loan forgiveness options.

Our blog is filled with many other options to help you budget and save.  

REPAYMENT

After you have your budget figured out, it’s time to consider your repayment options. When your loan enters repayment, your lender will automatically place you in a standard repayment plan. It is the basic plan for repaying loans.

Standard Repayment Plan:

• Repayment length: 10 years
• Number of payments: 120
• Payment amounts: Same amount each month
• This must be a federal student loan.

Payments on the standard repayment plan are typically larger than those with extended terms. With this plan, you will pay less interest and finish repayment sooner. If you are comfortable making this payment and have extra discretionary income, consider paying off the loan faster by making additional payments.

If the standard plan doesn't work for your budget, other repayment options exist. The federal government offers income-based repayment plans. These can significantly reduce your payment based on income and family size.

Income-Based Repayment Plan:            

• Repayment length: 20 Years
• Payment amount: 10% of your discretionary income
• Other qualifications: Must have federal direct loans
• Best for: Borrowers who don’t qualify for Pay As You Earn
• Any loans taken out after July 1, 2014 will fall under these specs. (Loans from before this date have different guidelines.)

Pay As You Earn: 

• Must have attended college after 2007.
• Repayment length: 20 years
• Payment amount: 10% of discretionary income
• Other qualifications: Must have federal direct loans
• Best for: Spouses with two incomes; graduate degree debt; those with low earning potential

Revised Pay As You Earn (REPAYE):

• Repayment length: 20 or 25 years
• Payment amount: 10% of your discretionary income
• Other qualifications: Must have federal direct loans
• Best for: Non-married borrowers, no graduate degree debt; higher incomes
• REPAYE will soon be replaced with Saving on A Valuable Education (SAVE).

Income-Contingent Repayment

• Repayment length: 25 years
• Payment amounts: 20% of your discretionary income or fixed payments based on a 12-year loan term, whichever is lower.
• Other qualifications: Must have federal direct loans. Parent PLUS loans must be consolidated into a direct loan to be eligible.
• Best for: Parent borrowers; slightly lower payments
• This is the only plan that a parent PLUS borrower can use and is the least generous. It costs more each month. You will need a parent PLUS loan or a consolidation that includes a parent PLUS loan.

According to the Department of Education, you should be notified by the U.S. Department of Education and your servicer ahead of time to remind you of when you'll need to start making payments again. Make sure your correct contact information is on file with your loan servicer so you receive all notifications. If you have questions about your repayment options, talk with your loan servicer to find out what options are available to you.

For a breakdown on the different student loan options available, check out this blog.