Repaying student loans in never an easy task. Deciding how much of your income should go towards your loans is as much of a personal decision as any recommended advice. Here are some general repayment tips to consider when trying to decide how much to put towards your student loans.
1) In General: Under most income-driven repayment plans, between 10-20 percent of your income is required to go towards paying your student loans. If you are not on an income-driven plan, this can be a good guideline to follow when trying to determine how much you should put towards your student debt
Most federal student loans default you to a standard repayment plan. If you think you can afford higher payments, prepaying is penalty free on all student loans and a great way to significantly reduce your total repayment.
2) For Saving: If you are concerned about saving for investment purchases such as a car or home, minimizing your monthly payment may be the ideal solution. Although your total lifetime repayment with likely increase, you will have more monthly cash available to you to jumpstart your future. If you want to extend your term, consider refinancing to change the terms of your loan.
3) Income- Driven Plans: For those of you who plan to use income-driven plans, here is a breakdown of what you can expect to pay for the following repayment plans according to Federal Student Aid.
- Income Based Repayment (IBR): 25-year repayment plan that requires 15 percent (Not New Borrower after July 1, 2014) or 10 percent of your discretionary income (New Borrower after July 1, 2014), but always never more than the 10-year Standard Repayment Plan amount.
- Pay As You Earn: 20-year repayment plan that requires 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount.
- ICR (Income-Contingent Repayment): 25-year repayment plan that requires the lesser of what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income or 20 percent of your discretionary income.
*Several factors such as income and family size can reduce or eliminate payment altogether
4) For Parents: Lenders generally advice to limit their total debt repayments to 37 percent of their gross income before taxes and deductions.
5) Refinance or Consolidate Your Loans: Always remember to consider refinancing if you are interested in changing the term of your loans to reduce your monthly payment into your ideal repayment plan to help with repaying student loans. Check out Credible and in as little as 30 seconds you can see if you can benefit from refinancing. A federal consolidation is also a great option if you already have low rates and only federal loans and simply want to shorten or extend your loan term.
As a best practice, it is important to talk with your financial advisor to see which options may be right for you.