Income-Based Repayment And Student Loan Refinancing

Choices With Student Loan Repayment

Paying off student loans can be a long, grueling process. For many, it doesn’t even begin for several years due to a lack of income on the part of the graduate after they leave school. By the time many are in a financial position to start repaying their loans, they’ve often accrued significant interest and find themselves owing much more than they originally did.

In fact, 43 percent of borrowers in the United States are not currently paying their loans — that’s a staggering 3 million people who have some form of postponement on their debt.

There are several options for alleviating this problem and paying your loans in a reasonable manner, including something called income-based repayment. Another option is to refinance your loan, though there are several factors to consider before going either route.

The Problems With Income-Based Repayment 

Interestingly enough, income-based repayment is a popular option for students these days; in fact, the number of students going this route increased 144 percent in the past two years. This type of repayment is available as a way to structure payments so that they reflect a reasonable percentage of your income, and they’re intended to ease the strain of student debt on young borrowers.

If you aren’t really struggling severely enough to make your payments, however, this option can do more harm than good.

“The Obama administration acts like they should be the default choice, but in fact, they were designed to be safety nets,” financial aid expert Mark Kantrowitz said.

The biggest issue with this type of repayment option is that the monthly payments don’t cover the monthly interest, which can cause you to pay more in the long run because your balance grows with the added interest. If you’re genuinely struggling with repaying your debt, income-based repayment might be a sensible option, however — and the good thing is, you can always switch your repayment option once you’re in a better financial position.

“The issue is most borrowers don’t know they have that option, that they can go from one plan to the other,” student loan counselor Jessica Ferastoaru said.

Pros And Cons Of Refinancing 

Refinancing your student loans might seem like a tempting option, given that lenders often offer smaller interest rates and ultimately lower monthly payments. The problem with this option, however, is that it means you lose the benefits that federal loan repayment gives you. Why? Because you can’t refinance your loans within the federal system.

By refinancing your loans with an outside lender, you’re losing such valuable benefits as income-based repayment and public service loan forgiveness.

“My big fear is that people are attracted by a low interest rate and saving on their monthly payments and aren’t paying attention to those benefits they’re giving up on the back end,” Education Finance Council president Debra Chromy said.

Budget For Your Loans 

The best thing you can do is budget for your loans. If you truly aren’t in a position to pay, income-based repayment might be an option for you. But if you’re able to pay your loans, you’re much better off going about the regular payment option in order to avoid interest issues.

Be smart about your loans and budget correctly, and you can easily come out ahead and pay the debt down in a reasonable amount of time.


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