When, How Often to Change the Repayment Plan for Your Federal Student Loans
When your federal student loan first entered repayment, you either selected a repayment plan or one was assigned to you. You can change your plan at any time, although there are certain key times that you may want to reconsider your repayment strategy.
Choosing a Repayment Plan
Federal student loan borrowers can choose from several different repayment plans, depending on income level and other circumstances like family size. You can change your repayment plan as often as you need to, but keep in mind that any changes will likely affect the total amount that you are expected to repay.
The standard repayment period for federal student loans is 10 years. Standard repayment is usually the fastest way to repay, which means you will pay less interest and save money over time.
However, if you are struggling to afford your monthly payments under the standard repayment plan, you can consider options like graduated repayment, extended repayment or income-driven repayment. These plans sometimes extend your repayment period and cause you to pay more over time, but you may receive a more manageable monthly payment in the near term.
[Read: How to Pay Off Student Loans.]
As you think about which repayment plan is right for you, you can use the Education Department's new Loan Simulator tool to see which plans you may be eligible for and get estimates on how much you would pay monthly and overall. You can also talk to your student loan servicer -- the organization that collects monthly loan payments and manages student loan accounts on behalf of the federal government -- as you consider your options.
Factors to Consider
If you work for a qualifying government organization or nonprofit and want to apply for Public Service Loan Forgiveness, you must complete 120 qualifying payments in an approved repayment plan. For approved repayment plans, you can speak with your servicer or go to the Department of Education's website.
Once you are enrolled in a qualifying plan and begin progress toward loan forgiveness, you do not want to change your plan or you risk becoming ineligible. If you are unsure whether you are in the right plan, talk to your student loan servicer.
Another detail to know is that when you switch repayment plans, any outstanding interest that has accrued may capitalize. That means interest that has been adding up and not paid gets added to your loan balance and will increase the amount that you owe. This is a particular concern for borrowers switching from an income-driven repayment plan, because monthly payments can be so low in these plans that you may have accrued a substantial amount of unpaid interest.
[READ: How Interest Increases Your Student Loan Balance.]
Finally, to enroll in an income-driven repayment plan, you will need to apply with your student loan servicer or at StudentAid.gov. If you enroll in this type of plan, you must reapply each year and provide updated income and family size information. If you miss the deadline to recertify, you will typically be automatically placed in standard repayment and your interest will capitalize. Contact your student loan servicer with questions about this process.
When to Reconsider Your Repayment Plan
You can reconsider your student loan repayment plan any time, but it might be beneficial to think about whether you are in the right plan at certain key times.
Struggling to repay. If you are struggling to make your monthly payment, you should contact your student loan servicer as soon as possible to discuss your options. Your servicer can help you find the right plan to avoid becoming delinquent on your loan or going into default, which can have major consequences on your credit score and affect your ability to borrow in the future.
New job or salary increase. If you are enrolled in any plan other than standard repayment, getting a new job or a raise in your salary is a great time to rethink your repayment strategy. You'll want to consider whether your financial situation has improved enough that you can afford to make higher monthly payments and whether you can save money by paying your loan off faster.
You'll want to consider how much you have left to pay, how much interest you have accrued and how much your monthly payments would increase. You can ask your student loan servicer for an amortization schedule to view your options in detail.
[Read: 6 Things to Know About Student Loan Amortization.]
Major life events. Buying a home, getting married, adding a new addition to your family or thinking about retirement can have a drastic impact on your monthly budget. Major life events such as these are a great time to assess your finances more generally and think about your financial health.
For example, you might look at how much you have in savings and how your monthly expenses might change in the future. When you know a big change is coming, this is a great time to ask yourself whether you can save money by paying more each month or whether you may need to lower your monthly payment to accommodate new expenses.
Going back to school. If you choose to return to school at least half time, your loans will automatically go into deferment. You will not be required to make monthly payments during this time, but some of your loans may continue to accrue interest.
Especially if you plan to take on more debt to pay for your courses, you may want to think about whether you can afford to continue paying some amount while you are in school and how much you will owe when you graduate. A good rule of thumb is to make monthly payments that are equal to any accrued interest you incur each month.
Taking on more debt can increase the amount you are responsible for paying each month after you reenter repayment, so now is a good time to think about how you plan to manage this payment with other monthly expenses.
If you end up choosing not to change your repayment plan, you can always prepay your student loans with any extra money from your job or monetary gifts, for example, at any time without penalties, which will pay your loans off faster.
In general, it makes sense to take stock of your finances at least once a year. At least every couple of years, you should consider whether you're still in the right student loan repayment plan. These are some great times to do that.
