Lori Meadows
Student loans can be a heavy burden, with many graduates facing decades of debt. There are ways to reduce the cost of repayments, such as enrolling in the SAVE plan, which is the most affordable student loan repayment plan. This plan can provide low monthly payments and reduce the time to loan forgiveness. Other options include income-driven repayment plans, which offer flexibility based on income, and contributing to tax-deferred retirement accounts, which can decrease your adjusted gross income and, in turn, your IDR payment. It's also important to prioritize student loan payments to avoid wage garnishment and late fees.
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What You'll Learn
Income-driven repayment plans
The U.S. Department of Education offers several income-driven repayment plans for federal student loans, which are designed to make your student loan debt more manageable by reducing your monthly payments. These plans are intended to help borrowers who are struggling to keep up with their loan payments due to financial hardship or other reasons.
With income-driven repayment plans, your monthly payments are typically capped at a certain percentage of your discretionary income, which is the difference between your annual income and 150% of the poverty line for your family size. This means that if your income decreases, your loan payments will also decrease accordingly. There are currently four types of income-driven repayment plans available: Income-Based Repayment (IBR), Pay As You Earn (PAYE), Revised Pay As You Earn (REPAYE), and Income-Contingent Repayment (ICR). Each plan has slightly different eligibility requirements and calculation methods for determining your monthly payment amount.
To apply for an income-driven repayment plan, you need to submit an application and provide documentation of your income and family size. The application process can be completed online through StudentAid.gov/idr. It is important to note that your loan servicer or the U.S. Department of Education can provide you with the most accurate and up-to-date information regarding these plans.
Once you're enrolled in an income-driven repayment plan, your monthly payments will be based on your adjusted gross income and family size. Any outstanding balance on your loan will be forgiven if you make on-time payments for 20 or 25 years, depending on the plan and your circumstances. However, it's important to be aware that the forgiven amount may be considered taxable income, so you might have to pay taxes on it.
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Interest accrual
When it comes to student loans, understanding interest accrual is crucial. Interest accrual refers to the accumulation of interest on a loan over time. Even during a grace period or deferment, interest may still accrue on student loans. This means that by the time borrowers start making payments, they may owe more than the original loan amount. This often comes as a surprise to graduates, who find themselves facing a larger loan balance and higher monthly payments than they anticipated.
For example, consider a student loan of $10,000 with a 6% fixed interest rate and a 6-month grace period. If no payments are made during this period, interest will accrue, resulting in a total debt of $12,700 by the time of graduation. This includes the original $10,000 principal and an additional $2,700 in accrued interest. Once the repayment period begins, borrowers must pay off both the principal and the accrued interest.
The capitalization process further adds to the interest accrual. Once interest is capitalized, the interest rate is applied to the new principal balance, which includes the accrued interest. This results in even higher monthly payments. In the given example, the monthly payment would be $107 after the deferral period.
Different types of loans have varying policies regarding interest accrual. Subsidized loans, for instance, do not accrue interest during the grace period as the federal government covers the interest payments. On the other hand, unsubsidized and PLUS loans start accruing interest immediately, and borrowers are responsible for covering the interest during deferment and their studies. Private loans also typically begin accruing interest while the borrower is still in school, leading to a larger loan amount by the time of graduation.
To manage interest accrual effectively, it is advisable to make interest-only payments during school and deferment periods. Even partial payments can significantly impact the overall loan balance, preventing it from ballooning out of control. This proactive approach can help borrowers stay on top of their student loan debt and reduce financial stress in the long run.
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Student loan forgiveness programs
Public Service Loan Forgiveness (PSLF)
This program is designed for government and qualifying nonprofit employees with federal student loans. Eligible borrowers can have their remaining loan balance forgiven tax-free after making 120 qualifying loan payments on an Income-Driven Repayment (IDR) plan and completing 10 years of full-time public service work. Teachers employed full-time in low-income public schools may also qualify for PSLF after teaching for five consecutive years.
Teacher Loan Forgiveness
Teachers who teach full-time for five complete and consecutive academic years in certain elementary or secondary schools serving low-income families may be eligible for forgiveness of up to $17,500 in federal direct or Stafford loans. To qualify, teachers must meet specific requirements and have taken out loans after October 1, 1998.
Total and Permanent Disability (TPD) Discharge
If you have a physical or mental disability that severely limits your ability to work now and in the future, you may qualify for a TPD discharge. This means you won't have to repay your federal student loans or complete certain grant service obligations. Proof of disability is generally required, and there may be a post-discharge monitoring period.
AmeriCorps Service
Completing a term of national service in an approved AmeriCorps program, such as AmeriCorps VISTA, AmeriCorps NCCC, or AmeriCorps State and National, can make you eligible for the Segal AmeriCorps Education Award. This award can be used to repay qualified student loans, and AmeriCorps service can also count toward PSLF.
It's important to note that these are just a few examples of student loan forgiveness programs, and there are other paths to loan relief as well. Each program has its own specific criteria, so it's essential to review the requirements carefully to determine your eligibility and choose the most suitable option for your situation.
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SAVE repayment plan
The SAVE repayment plan was introduced by the Biden Administration in 2024 as part of an effort to implement student loan bailouts. The plan was blocked by a federal court in the same year and was later deemed unlawful by the Eighth Circuit Court of Appeals in February 2025.
The SAVE Plan offered a forbearance period with a zero percent interest rate on federal student loans. However, with the plan being deemed unlawful, borrowers will now need to transition to a legally compliant repayment plan. The Department of Education is urging borrowers to switch to plans such as the Income-Based Repayment Plan, which is compliant with court rulings.
As a result of the court rulings, borrowers who were enrolled in the SAVE Plan will now see their loan balances grow as interest starts accruing. When the SAVE Plan forbearance ends, borrowers will be responsible for making monthly payments that include accrued interest as well as their principal amounts.
To assist borrowers in transitioning to a new repayment plan, the Department of Education is providing resources and instructions. Borrowers can use the Loan Simulator to compare available repayment plans, determine their repayment eligibility, and identify the option that best meets their needs. Additionally, the Department has improved the processing of IDR applications, allowing for faster switching from the SAVE Plan to another IDR plan.
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Budgeting
Understand Your Loan Repayment Options:
The first step is to familiarize yourself with the various student loan repayment plans available. The SAVE plan, for instance, is the most affordable repayment plan, offering lower monthly payments and faster loan forgiveness for smaller loans. Income-driven repayment (IDR) plans, such as the SAVE plan, adjust your monthly payments based on your income and can provide much-needed flexibility. If you're a parent with PLUS loans, look into the Income-Contingent Repayment (ICR) plan, which offers loan forgiveness after 25 years.
Prioritize Loan Payments in Your Budget:
Make repaying your student loans a priority in your budget. Ensure you're at least making the minimum payments to avoid late fees and wage garnishment. If you can, aim to pay extra towards your loans to reduce the overall interest you'll pay over time.
Reduce Interest Charges:
Interest can significantly increase the total cost of your loan. To minimize interest charges, make extra payments whenever possible and apply them to your highest-interest loans first. Additionally, consider enrolling in an IDR plan, as your interest may not be charged if your monthly payment doesn't cover the accrued interest under the SAVE plan.
Adjust Your Budget to Accommodate Payments:
Evaluate your budget to find areas where you can cut back on non-essential expenses. This can help you allocate more funds towards your student loan payments. For example, instead of eating out frequently, cook at home, or limit unnecessary subscriptions or entertainment expenses.
Stay Organized and Communicate:
Keep detailed records of your loan servicer's communications, including mails, emails, and phone conversations. Note down dates, names, and key discussion points. Stay in touch with your servicer and ensure they have your updated contact information. Open and respond to their communications promptly to stay on top of any issues or changes that may affect your repayment plan.
Take Advantage of Tax Benefits:
Don't forget about tax benefits that can help offset the cost of your student loans. Depending on your income and tax filing status, you may be able to claim up to $2,500 of the student loan interest you paid in a given year on your tax return.
Save for Retirement:
Contributing to a tax-deferred retirement account, such as a 401(k) or 403(b), can decrease your adjusted gross income (AGI) and, consequently, your IDR payment. This strategy can help you reduce your loan payments while also building your retirement savings.
Remember, budgeting for student loan repayment is a personal process that depends on your unique financial situation. Stay informed about your repayment options, be diligent with your budget, and seek additional resources or advice if needed to help you navigate this financial journey effectively.
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Frequently asked questions
The SAVE plan is the most affordable student loan repayment plan. It may provide you with the lowest monthly payments and reduced times to getting loan forgiveness. It also prevents interest from accruing on your loan balance.
You may be eligible for a lower monthly payment, possibly as low as $0, through an income-driven repayment (IDR) plan. Your monthly payment is based on your adjusted gross income (AGI).
A minimum payment is still a late payment for student loans. If you cannot pay in full, you should find solutions to avoid default and wage garnishment.
Extra payments can help you get out of debt faster and save you money on interest. You should also claim your student loan interest on your tax return. Depending on your income and tax filing status, you may be able to claim up to $2,500 of the student loan interest you paid in a given year.
