It is inevitable that the majority of college students will have student loans to repay upon completing their college education. The best route they can follow is to try and repay as much of the principal as they can in the early days whilst they have fewer financial commitments than a few years on. Living frugally, as though still a student, and paying down loans aggressively is the best way to tackle reducing student loan debt.
However some find that the size of their student loan payments is just too high. Anyone who moves into a public sector career or other relatively low paying job may find that they struggle to meet the basic monthly repayments. The solution available is to refinance the outstanding student loans and either look to reduce the interest rate and thus have smaller monthly payments, or extend the period of the loans to reduce the monthly payments. The latter is not recommended as good fiscal practice unless it is a must, as it will end up increasing the total amount repaid, as well as possibly leaving the debt to span many years.
Federal student loans can be refinanced by consolidating each of the loans into one monthly payment. It may be possible that a lower fixed rate is available which would mean a smaller monthly payment without the necessity of extending the term of the loan. However those who need to reduce the monthly payment do have the option to extend the duration of the loan. They should consider what that means over the long term and if they really want to still be paying off student loans in their 40’s.
Another option to deal with federal student loans for those who can demonstrate financial hardship is to apply for the income based repayment plan which is specifically designed for those in public sector roles. The monthly repayments on the loans will be capped at around 10% of income and as long as all payments are met then the balance of the loan is eligible for forgiveness after 25 years.
Those whose incomes improve can switch out of the income based repayment plan and pay off the loans earlier. If financial hardship is a factor because of a public sector career it may be more prudent to look at the federal student loan forgiveness program than the IBRP, as this will clear the debts much quicker.
Private student loans can be refinanced through private lenders. Again there will be the option of trying to find a lower interest rate or of extending the term of the loan. Once again the option to extend the loan will cost far more over the long term than the original term.
Refinancing loans to reduce the monthly payments has the inevitable downside of making the loan repayment term drag on. This will mean the loans cost far more to service than originally planned for even though the actual monthly payment is reduced. Whilst it makes excellent sense to consolidate student loans and look to find a lower interest rate, extending the term of the loan should only be considered as an absolute must.