SoFi

When it’s time to start repaying your federal student loans, your options can be confusing. It’s not as simple as sending your loan servicer a universally fixed payment or paying whatever you think you can afford. How much you owe each month can vary dramatically depending on how you choose to repay your loans.

The government currently offers eight repayment plans that let you knock out your student loans in as little as 10 years or as many as 30 years. Five of the options take into account how much money you make. Income-driven repayment plans are geared toward making the process affordable for everyone, but each is slightly different.

Choosing the right plan depends on many factors, such as the types of student loans you have, when you took them out, and how much you are making. You can switch plans anytime over the life of your student loans as your circumstances and income change.

Income-driven repayment plans may lower your monthly payment, which can be a lifesaver. But keep in mind that if you lower your monthly payment you might be done by extending the length of the loan. If that is the case, you’re also likely to pay more overall, because the interest adds up over a longer period.

Here’s a roadmap to understanding income-driven repayment and which plan is right for you.

What is an income-driven repayment plan?

An income-driven repayment plan makes your monthly student loan payments affordable by tying them to how much money you earn. These types of student loan repayment plans allow you to take more time repaying your loans than most plans that aren’t tied to your income. Most of them forgive the remainder of your student loans as long as you make the required payments for 20 to 25 years (but keep in mind you may have to pay taxes on the forgiven amount).

Your monthly payment under each plan will change each year depending on your situation. Four of the income-driven plans calculate your monthly student loan payment based on your discretionary income , which is defined as the difference between your annual income and either 100% or 150% of the poverty line .

Your monthly payment is recalculated every year based on your current income, family size, and in one case, the amount of your student loans. (There’s also an income-sensitive repayment plan which bases your payment on gross annual income.) You can figure out how much you’d pay under each plan on the Department of Education’s website .

Types of Income Driven Repayment Plans

Here are five income-based repayment plans that you can choose from:

Revised Pay As You Earn Repayment Plan (REPAYE)

● Your monthly payment is generally 10% of your discretionary income and is recalculated each year.

● Any remaining student loan balance will be forgiven in 20 or 25 years.

● This applies to Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans to students, and Direct Consolidation Loans, that don’t include Direct PLUS Loans (Direct or FFEL) taken out by parents.

Pay As You Earn Repayment Plan (PAYE)

● Your monthly payment is generally up to 10% of your discretionary income, but never more that the 10 year Standard Repayment Plan amount, and is recalculated each year.

● Any remaining student loan balance will be forgiven in 20 years.

● This applies to Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans to students and Direct Consolidation Loans that don’t include Direct PLUS Loans (Direct or FFEL) taken out by parents.

Income-Based Repayment Plan (IBR)

● Your monthly payment is generally 10% or 15% of your discretionary income, depending on when you became a borrower, but never more that the 10 year Standard Repayment Plan amount. The amount is recalculated each year.

● Any remaining student loan balance will be forgiven in 20 or 25 years.

● This applies to Direct Subsidized and Unsubsidized Loans, all PLUS Loans to students, Subsidized and Unsubsidized Federal Stafford Loans, and Consolidation Loans (Direct or FFEL) that don’t include Direct PLUS Loans take out by parents.

Income-Contingent Repayment Plan (ICR)

● Your monthly payment is whichever is less: 20% of discretionary income or the amount you would pay if you spread your payment evenly over 12 years, adjusted based on income and is recalculated each year.

● Any remaining student loan balance will be forgiven in 25 years.

● This applies to Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans to students, and Direct Consolidation Loans.

● This is the only income-based repayment option for parents who took out Direct PLUS loans. They can access this plan by consolidating them into a Direct Consolidation Loan.

Income-Sensitive Repayment Plan

● Your monthly payment is based on your annual income, with the formula varying depending on your lender.

● You have 10 years to repay the loan.

● This applies to Subsidized and Unsubsidized Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans

How to Qualify for Income-driven Repayment

You’re not eligible for an income-driven repayment plan if you’ve defaulted on your student loan. (If you’re in that situation, there are options for getting out of default.

Anyone who has taken out eligible federal student loans can opt in to the REPAYE and ICR plans. To be eligible for the PAYE plan there are additional requirements to qualify. First, you need to be a ‘new borrower’ as of Oct. 1, 2007 and have received a loan disbursement on or after Oct. 1, 2011 You are considered a new borrower if you had no outstanding balance on a Direct Loan or FFEL Program loan on or after Oct. 1, 2007.

In addition, you can only qualify for the PAYE and IBR plans if your monthly payment is lower than what you would pay under the Standard Repayment Plan, which spreads your balance over 10 years. That means you’re generally eligible if your student loan balance represents a major chunk of your annual income or exceeds it.

What student loan repayment options exist besides income-driven repayment?

If you work in public service, you qualify for an even better deal: Public Service Loan Forgiveness . Under the program, you need to make 120 qualifying monthly payments under an income-driven repayment plan, working for a qualified employer and your remaining balance is eligible to be forgiven.

Related: 20 Year Student Loan Refinance vs Income-Driven Repayment

The payments don’t have to be consecutive, but if they are, you could be free of your student loans in 10 years. Some eligible employers include various levels of government, a 501(c)(3) nonprofit, even an organization that provides certain public services, such as law enforcement, public interest legal services, the military, public health, and more.

If you’re not in public service and an income-driven repayment isn’t right for you, that doesn’t mean you’re stuck with impossibly high payments. One option is to choose the Extended Repayment Plan, which lets you spread your student loans over 25 years and pay a fixed or graduated amount each month.

A second option to consider if you’re having trouble paying your student loans because of a temporary situation (say you went back to school or can’t find a job), is applying for deferment or forbearance . These are short-term solutions may reduce your student loan payments for a limited time.

Another option is consolidating your student loans. Consolidation may give you more time to repay your student loans or lower your interest rate.

A Direct Consolidation Loan from the federal government can also give you access to income-driven repayment programs that you might not have otherwise qualified for based on the student loan you had. (Keep in mind that consolidating your student loans may force you to give up credits you’ve earned toward loan forgiveness.)

Another potential way to save money is student loan refinancing. A private lender may help consolidate both federal and Private student loans to provide a new interest rate based on your credit and current finances. That could substantially reduce the interest you pay on your student loans, but it disqualifies you from federal student loan benefits, such as income-driven repayment and public service forgiveness plans.

Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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Many lenders—including both online lenders and brick-and-mortar banks—advertise guaranteed-approval personal loans. Also known as payday loans, guaranteed personal loans are usually secured by your paycheck. Basically, lenders use this type of loan to approve anyone, regardless of his or her credit score. Some lenders will offer cash on the same day that you apply for the guaranteed personal loan, even without checking your credit.

These offers can sound appealing, especially if you have shaky credit, don’t have savings to fall back on, or need money immediately for a financial emergency. But unfortunately, guaranteed-approval personal loans usually come with a catch. Often the only sure thing with a guaranteed personal loan is that you are more likely to owe more than you bargained for down the line. They usually come with high interest rates, among other extremely unfavorable terms.

It may feel like taking out a guaranteed personal loan is your only choice, but you have other options. Consider asking family or friends for help, requesting an advance from your employer, or applying for emergency help from a local community organization. If those options aren’t available to you, try applying for an unsecured personal loan.

Lenders offering unsecured personal loans won’t guarantee your approval, but many, including SoFi, look at more than just your credit score to determine your eligibility and you may be surprised to find that you still qualify.

Further, many online lenders are trying to make the process of getting funded for unsecured personal loans quicker as well. If you do, taking out an unsecured personal loan can be a safer bet for getting the cash you need now without paying dearly for it later.

The Drawbacks of Guaranteed Personal Loans

Guaranteed-approval personal loans may indeed get you money fast, but we all know there’s no such thing as a free lunch. The repayment terms you may be stuck with will often be extremely disadvantageous, even predatory.

For example, lenders who offer guaranteed loans could ask you to repay the debt in a matter of weeks. If your finances don’t improve and you can’t pay back the loan, your debt could grow exponentially. Guaranteed personal loans might even charge the equivalent of 400% interest . So if you’re already having a tough time financially, taking out a payday loan can be on slippery slope.

Unsecured personal loans, on the other hand, aren’t secured by personal assets to recover in case of default, which is why lenders are more careful about who they lend to.

Why an Unsecured Personal Loan Might Cost Less

The easy money that comes with a guaranteed-approval personal loan can bear a high cost. When you take out a payday loan, you might end up paying $10 to $30 for every $100 borrowed. That means if you borrow $300, you could have to pay back up to $390 in a short period of time. And if you don’t pay the loan off completely, you could face additional fees.

An unsecured personal loan is not guaranteed-approval, but it could cost you less in the long run. Unsecured personal loan rates usually aren’t as low as interest rates on some student loans or mortgages, but they could still be lower than rates associated with payday loans.

Furthermore, taking out an unsecured personal loan can come with a more reasonable repayment timeline that could help prevent you from falling into default or mounting high-interest debt.

What does SoFi consider when issuing personal loans?

SoFi offers unsecured personal loans from $5,000 to $100,000 with low fixed interest rates and flexible repayment terms. You won’t have guaranteed approval, but SoFi takes a number of factors into account to make sure all applications are fairly considered.

SoFi looks not just at your credit score but also at your financial history, your monthly income and expenses, your career experience, and your current employment. If you qualify, a personal loan can be a more responsible and less costly way to deal with a financial emergency.

SoFi Lending Corp. or an affiliate is licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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The average Class of 2016 graduate walked down the commencement aisle with $37,000 in student loan debt . We all know that higher education is expensive, but that’s a big responsibility for a 22-year-old to be saddled with as they start their career. The interest payments on a $37,000 loan alone could afford the average new grad a whole lotta revolutions through the Taco Bell drive-thru and pairs of polyester work slacks. (Or better, the ability to start saving some money!)

If you have student loans, there is a way to reduce the amount of interest you pay over the lifespan of your loan or loans; It’s called student loan refinancing. There are people who have refinanced their loans and saved tens of thousands of dollars—and it’s possible you could too.

You’ll often hear the terms student loan refinancing and student loan consolidation used interchangeably, but they’re technically different. Only student loan refinancing has the potential to reduce how much you pay in interest. If your goal is to reduce what you owe, you’ll need to learn how to refinance student loans. Because it’s important to understand which is right for your situation, let’s hash out the definitions and details of both options.

Student Loan Refinancing Breakdown

Okay, so your current loans are either obtained through the government (that’s the most common route) or a private lender, like a bank (less common). Each loan has an interest rate—likely, a fixed rate of interest—set at the time you took out that loan. (If you have loans issued before 2006, there is a possibility that rates on your loans are variable, which means the interest rate may fluctuate.)

When you refinance one or all of these student loans, you’re basically just swapping out the old loans and replacing them with a fresh, new one in hopes of getting a better rate or more favorable terms.

Quite literally, the new lender pays off your old loan(s) and provides you with a spankin’ new loan. Now, the reason it’s worth it to learn how to refinance student loans is because it can lower your interest rate or term, thereby saving you money. A better interest rate or term can either lower your monthly payments or reduce the time it takes to pay off the loan, respectively.

Getting Started With Refinancing

The first step is to explore whether refinancing is the right option for you. Refinancing has historically only been available for federal loans, but there are a handful of lenders who refinance private loans as well. This is not the case for simple loan consolidation, which can only be done with federal loans.

If you’ve got federal loans and are taking advantage of income-based repayment or the Public Service Loan Forgiveness program, it may not be worth learning how to refinance student loans; Those programs (and other benefits) won’t transfer to your new loan . If you have no plans to take advantage of any federal debt-relief program, it’s time to look into refinancing.

Local banks and credit unions often offer student loan refinancing, but online lenders like SoFi tend to offer more competitive rates. Each lender has its own criteria for determining your rate, but it’s generally based in part off credit score and income.

Student loan refinancing is generally available to folks who are in better financial situations than when they first took out loans, whether through increased salary, improved credit score, or another circumstantial shift, like marriage. Refinancing can also help if you have loans with exceptionally high interest rates.

Even a seemingly small improvement in your loan’s interest rate could save you a lotta scratch in the long run. (Which could amount to hundreds, potentially thousands more T-Bell odysseys! Or some extra money for retirement or a down payment, your call.)

Often, you’re able to get pre-approved for refinancing online in a matter of minutes. After pre-approval, you select the loan you want, fill out a full application, upload or mail in some key financial documents, and voilà! You’ve done your part.

Here’s the Difference Between Student Loan Refinancing and Consolidation

Consolidation is exactly what it sounds like; You’re consolidating multiple loans into one loan. And that’s it! Because you’re just smushing all of your (federal) loans together without any accompanying re-evaluation of your credit, your interest rate won’t change. The rate on your new consolidated loan will simply be a weighted average of your current loan rates. Your monthly payment would only decrease if your payback period was extended, which would actually cost you more in interest over time.

Loan consolidation is typically done using a Direct Consolidation Loan through the government. This is why you can only consolidate federal loans and not private ones. The benefit to consolidation is creating one payment instead of dealing with multiple loan payments. It is also possible to detach or add cosigners and switch from a variable to a fixed rate.

It’s worth noting that refinancing is sometimes referred to as “private loan consolidation.” And yes, when you refinance multiple loans, you are inherently consolidating them. But for the sake of keeping the two mentally separated, consider consolidation and refinancing as two different actions.

Benefits of Refinancing Student Loans

Ideally, a student loan refinance would benefit you in the following ways:

1. You could pay less in interest over time, which can mean lower monthly payments.

2. It can also shorten your loan term, allowing you to pay debt off sooner.

3. You get to enjoy the benefits of consolidation with one monthly bill.

4. There are both variable and fixed rate loans available. The benefits of having a lower monthly payment or a shorter payback period need no championing, but it is pretty sweet to think about what you could do with all that extra cash. SoFi estimates that the average customer saves $30,069 in interest over the lifetime of their loan.

Additional Refinancing Considerations

When you refinance, not all lenders will give you the same repayment options that federal loans offer. This is important to consider, especially if you work in an industry sensitive to economic cycles. As with any financial decision, refinancing should only be done after considering all of the trade-offs.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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