Student Loan Repayment – Options to Pay Off Debt
As the use of student loans to pay for college has increased, so have the many options now available to repay those loans and, potentially, even have them forgiven by the government. Whether a student is still in college and already has loans, or is in high school and considering how much to borrow, understanding the different loan repayment and forgiveness options available can help families make informed decisions. By choosing wisely, both students and parents will improve the likelihood that they will be able to save for, and achieve, a secure retirement.
Over the last two decades, the use of student loans to pay for college has grown substantially. Seventy-one percent of the class of 2015 graduated with student loan debt, as compared to 54% of graduates twenty years earlier.1 Meanwhile, the average amount borrowed more than tripled over the same period, from an average debt amount of $11,491 in 1995 to $35,051 in 2015.2,3
Interestingly, it is not just students who are borrowing more. Parents are also taking out more loans and borrowing higher amounts. Seventeen percent of parents of 2015 graduates borrowed from the federal government under its student loan program and had an average amount of debt of nearly $31,000. This is up from 7% of parents in 1995 under the federal program, with an average amount of $7,800.4
Perhaps surprisingly, the landscape for college loans has changed dramatically over the last decade. Not only have the lenders changed, but new repayment options and loan forgiveness options have been introduced as well.
Since 2010, all new federal loans, except for Federal Perkins Loans, have been issued through the U.S. Department of Education under the Direct Loan Program. Prior to 2010, some federal loans were issued by private lenders and backed by a government guarantee. While families can also borrow from private institutions, federal loans should typically be the first option since they tend to offer better terms than private loans, including lower interest rates, loan consolidation opportunities, and flexible payment plans.
Prior to taking out loans to finance a college education, families should understand the different repayment options that will be available post-graduation. In addition, families should consider whether monthly repayment amounts will be affordable based on a student’s projected career earnings in a desired field. Online tools are available to assist in modeling the repayment amounts that student loan debt will translate into during the repayment phase.
The purpose of this guide is to help families understand how loans can be repaid after graduation. It will first describe the available federal student loans, and the federal loan repayment and loan forgiveness options available. It will then provide information on borrowing from private lenders. The guide will conclude with a discussion of how some employers are now helping their employees pay back their loans more quickly.
1 Kantrowitz, Mark, "Who Graduates with Excessive Student Loan Debt?", p. 2, 2015. http://www.studentaidpolicy.com/excessive-debt/
3 These figures represent amounts borrowed from the federal government and do not include private loans. The term "private loans" refers to loans made by private institutions that are not backed by a government guarantee. Federally backed private loans that were made prior to 2010 are not considered private loans in these figures.
4 The College Solution, "How Much Parents and Students Are Borrowing for College," 2015, http://www.thecollegesolution.com/how-much-parents-and-students-are-borrowing-for-college