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Navigating the Maze of Student Loan Repayment Options

Navigating the Maze of Student Loan Repayment Options

December 05, 2019

Graduating from college is certainly cause for celebration! But for many graduates, earning a higher education degree has left them with sizable student loan debt. Fortunately, there are a variety of repayment choices available—from consolidation to refinancing—to help lessen this burden.

So, which path should your children or grandchildren take when navigating the maze of repayment options? It will depend, in part, on which type of student loans they have: federal or private.

Repayment plans

Federal student loans. If they’ve taken out federal student loans, there are quite a few repayment plans available.

  • Standard repayment. Based on their loan balance, with standard repayment they are required to pay a fixed amount each month for up to 10 years.
  • Graduated repayment plan. With this structure, they make lower payments in earlier years and then increase payment amounts in later years, for up to 10 years. This plan can be helpful for those who anticipate earning a higher income in the future.
  • Extended repayment plan. This plan extends the amount of years in which they repay the loan, up to 25 years. Here, it’s important to note that the amount of interest they pay over the life of the loan will increase with a longer repayment period.
  • Income-driven repayment plan. Depending on when their loan was obtained, different income-driven repayment programs are available. To participate in one of these plans, they will need to apply and meet the qualification requirements. They include a payment around 10 percent to 20 percent of their discretionary income, with the possibility of loan forgiveness after 20 to 25 years. If a student loan is forgiven through this program, the amount forgiven will be considered taxable income.

More details about these plans, as well as a repayment estimator calculator, are available on the U.S. Department of Education’s website. Their loan servicer is also available to assist with implementing whichever repayment option they select.

Private student loans. For those with private student loans, the repayment options are a bit more limited, and all of the details can be found in their original loan agreement. On average, private loan repayment terms range from 5 to 20 years. Unlike federal student loans, private student loans generally do not provide income-driven repayment options or loan forgiveness.

Loan consolidation

If graduates have multiple loans, a main advantage of consolidation is that they will have only one payment to one lender.

Federal student loans. With the federal loan consolidation program, they still have access to the federal repayment options discussed earlier. But their interest rate will not decrease. The interest rate will be a weighted average of all the rates on the loans, rounded up to the nearest 0.125 percent. Prior to consolidation, carefully review their existing loans for any benefits (e.g., interest rate discounts or principal rebates) or payment credits toward loan forgiveness they may relinquish upon consolidation.

Private student loans. When they meet certain qualifications, private loans can be consolidated into one new refinanced loan, ideally with a lower interest rate.

Loan refinancing

One reason to think about refinancing is to obtain a lower interest rate, which in turn can lower the amount of interest they will pay over the term of the loan. They should expect to pay a fee to refinance, and the interest rate will depend on current market rates and their credit score.

The only option for refinancing federal student loans is with a private loan. A word of caution here: if they are refinancing from a federal loan to a private loan, they cannot return to a federal loan. Be aware that moving away from a federal oan means they will lose income-driven repayment options and any loan forgiveness that might have been available with the federal student loans.

Loan forgiveness

Public Service Loan Forgiveness Program. When they work full-time for a qualifying nonprofit or government agency, certain loans (e.g., Direct Loans) may qualify for the Public Service Loan Forgiveness Program in conjunction with an income-driven repayment program that includes 10 years of qualifying payments. The amount forgiven will not be considered taxable income.

Teacher Loan Forgiveness Program. This program may provide loan forgiveness up to $5,000 or $17,500 for certain loans when various qualifications are met, including teaching full-time for five years in a low-income school or educational service agency. Again, the amount forgiven will not be considered taxable income.

Repayment tips

As graduates begin to consider these student loan repayment options, it may help to keep these tips in mind:

  • Automatic repayments may slightly lower the interest rate with some lenders. It may be worth asking their lender or loan servicer if this applies to their loans.
  • A budget can help manage their expenses to free up additional funds to repay their loans or to make extra payments.
  • When making extra payments, consider focusing on repaying the student loans with the highest interest rates first.
  • Private student loans have fewer repayment options and protections available compared with federal student loans. As such, evaluate if it makes sense to repay private loans ahead of federal loans, taking into consideration the respective interest rates.
  • Look for ways to increase their income, such as working overtime or obtaining a second job to help with extra payments.
  • Depending on their income, part of the student loan interest they pay may be tax deductible up to $2,500. (Please note: This deduction is not available if someone else can claim them as a dependent on his or her tax return.)
  • If they stretch out the number of years they will be repaying the loan, they will increase the amount of interest paid over the life of the loan.
  • How they repay their student loans will affect their credit. For example, if they are late or skip payments, that may harm their credit score, which may limit their future ability to obtain a new loan at a reasonable rate or to refinance their existing student loans.

Weigh the options

Repayment and consolidation options will vary depending on the type of loan.

If your children or grandchildren are struggling to make their student loan repayment, they should contact the lender or the loan servicer for help. In certain circumstances, the lender may allow a loan deferment or forbearance to delay payments for a limited time.

As always, before making any decisions, consider consulting a financial advisor.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to be sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.


Dan Flanagan is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or

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