The student loan repayment decision can be confusing but is critical to your financial future. To select the best student loan repayment method, you need to consider other things before you make your decision.
The first priority within the entire process is to avoid student loan default. The penalties are severe. By missing payments this could impact your credit score and incur fees up to 19 percent of the loan balance. If you feel that you may miss payments due to a change in your financial situation, you need to contact your loan servicer immediately.
One reason for people getting into this situation, is they do not understanding their repayment options at the beginning. Many students do not properly plan and will use the default method, which is the 10 year standard method. This is the most expensive on a monthly basis but also the cheapest over the life of the repayment process.
There are 8 different federal loan repayment options. Each of these methods have advantages and need to be reviewed before you make your final decision. If you work for a non-profit or the government, you should also consider the Public Service Loan Forgiveness Program. Only certain repayment methods qualify for the PSLF program.
The problem many students face is that they do not anticipate the future changes in their life. This could include job changes, marriage, tax filing status and other financial changes. These are important factors that you need to consider before you make your student loan repayment decision. The life style changes are often not discussed by the colleges and loan servicers.
Having a short term plan and a long term vision on each of your options is critical and not often done. Selecting the best student loan repayment method needs to consider your current cash flow, career growth, type of employer and your tax filing status over the loan repayment time frame. This plan may need to consider up to 25 years of living.
The biggest issue that people will face is the lack of vision of the other personal financial issues within the decision. The colleges, government, and loan servicers will not give you the insights on the these other personal financial issues in the decision process. Most will only give you the advice on selecting the lowest monthly payment which can be the wrong option for the long term.