The class of 2015 will leave college with more than a degree. They’re also shouldering the most student debt in U.S. history.
Rising tuition rates have made it tougher for families to cover the cost of college and forced a growing number of students to take on more loans.
And graduates will be paying hefty interest rates on their debt. For the 2014-2015 graduating class, interest rates on federal student loans range from 4 percent to 7 percent and rates on private student loans can be even higher. But there strategies for repaying your loans that can help to ease the burden, and even save you money.
Here are three ways to win in the game of student loans:
Ask for forgiveness
See if any of your debt can be forgiven. “The first thing you should consider is taking a look at some government programs,” said John O’Meara, a certified financial planner at InnerHarbor Advisors in New York City.
For example, under the Public Service Loan Forgiveness program, you could qualify for forgiveness of part of the balance on your federal loans If you work in a full-time public service job like teaching, the military or public safety.
In order to qualify, you must make 120 scheduled, on-time, full, monthly payments on your loan. When you make them, you also must be working full time (defined as an average of at least 30 hours per week) at a qualifying public service organization. Employment at federal, state and local government agencies as well as tax-exempt, non-profit organizations qualify for this program.
Craft a repayment strategy
The best option is to pay off as much as you can on your student loans as soon as you can, Kantrowitz said. “Students should choose the repayment plan with the highest monthly payment they can afford. This will save them the most money over the life of the loan,” he said, as it will lower the amount you’ll pay in interest.
But if you’re struggling to make the payments, you may be able to get an extended repayment plan—converting a standard 10-year loan, for example, into one that stretches over 25 years. Your monthly payments will be lower, but keep in mind that you’ll be paying more with interest in the end.
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Another option is an income-driven repayment plan. There are three types of these plans:
- An income-based repayment plan generally lets you pay 10 to 15 percent of your discretionary income. The payment will never be more than what it would be under a 10-year standard repayment plan.
- A “pay as you earn” plan generally lets you pay 10 percent of your discretionary income to the loan.
- An income-contingent repayment plan lets you pay 20 percent of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, based on your income.
Government loans offer a number of repayment options. But whatever route you choose, be sure to avoid default. Contact your student loan provider if you’re worried about being able to cover monthly payments, and discuss your options. If you default on your loan, you may be charged additional fees, have your wages garnished or end up being sued by your lender for repayment. It can also damage your credit.