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Are you heading out of the country on a digital nomad adventure? Before you hit the skies, make sure your student loans are on the right repayment plan.
If your payments are too high, you could end up struggling financially in another country (stressful). If too low, you might end up paying way more interest than you need to.
So before you pack your bags, get your student loans on the right repayment plan for your budget. Here are your options for student loan repayment plans, whether you’ve got federal or private student loans.
Student loan repayment plans for federal student loans
If you borrowed federal student loans, such as subsidized or unsubsidized Direct loans, you’ve got a variety of options for student loan repayment plans. Here are your choices, along with tips on who should choose which plan.
1. Standard 10-year plan
Most federal student loans automatically go on the standard plan after your grace period ends. The standard plan spans 10 years, and you’ll make fixed payments from month to month.
For example, let’s say you owe $25,000 with a 5.0% interest rate. On the 10-year plan, you’d make monthly payments of $265. Over 10 years, you’d pay $6,820 in interest.
If this plan works for you, you typically don’t have to do anything but pay your bills. Your loans will stay on this plan until they’re paid off.
2. Income-driven repayment plan
If your student loan bills are too high, consider putting your loans on an income-driven plan. Income-driven plans adjust your monthly bills in accordance with your income, so you’ll never have to pay more than 10%, 15%, or 20% of your salary.
They also extend your terms to 20 or 25 years, which is why you can get away with reducing your monthly payment so much. And here’s one of the best perks: If you still have a balance at the end of your term, it could be forgiven.
You have four main options for income-driven plans:
- Revised Pay As You Earn (REPAYE): Caps your monthly payment at 10% of your discretionary income and extends your terms to 20 or 25 years. If you still have a balance after this time, it will be forgiven.
- Pay As You Earn (PAYE): Same as REPAYE, except it extends all terms to 20 years.
- Income-Based Repayment (IBR): Adjusts your payments to 10% or 15% of your income and assigns terms of 20 or 25 years, at the end of which your balance could be forgiven.
- Income-Contingent Repayment (ICR): Makes your payments 20% of your discretionary income or the amount you’d pay on a fixed 12-year plan. It extends your terms to 25 years and could end in forgiveness. Note that ICR is the only plan that Parent Plus loans can qualify for, and only if you consolidate them first.
Income-driven plans can lower your monthly payments, which can take some of the pressure off your wallet. But they’ll also leave you in debt for longer, meaning you’ll pay more interest overall.
That said, you can go off an income-driven plan (or make extra payments) if you make more money in the future and want to pay your loan off faster.
If you decide to go with one of these plans, you’ll likely need to reapply for it every year.
Pro tip: Are you planning to work for a foreign employer? If your U.S.-based income is $0, your payment on an income-driven plan could also be $0. After 20 or 25 years, you could get your entire balance forgiven without paying a dime (except for whatever taxes you have to pay on the forgiven amount). Learn more about this secret strategy in this guide.
3. Extended repayment plan
This plan extends your terms to 25 years, decreasing your monthly payments as a result. You can choose fixed payments, which stay the same over the life of your loan, or graduated payments, which slowly increase.
If you go with graduated, your final payment won’t exceed three times more than your original one. So if you started with a $100 monthly payment, your final payments won’t be greater than $300.
Unfortunately, this plan doesn’t end in loan forgiveness after 25 years, the way that income-driven plans do. And if you put your loans on it, they won’t be eligible for the Public Service Loan Forgiveness program, in case you’re considering that route.
So while the extended plan can be helpful for adjusting your monthly payments, an income-driven plan might be the better option.
4. Graduated repayment plan
The graduated repayment plan could be a useful option for borrowers who aren’t making a lot of money now, but expect their income to increase in the future.
With the graduated plan, you start out with a lower monthly payment, and it gradually increases every two years. You’ll still pay your loans off over a 10-year period, but your monthly bills will go up over time.
That said, they’ll never be more than three times any other payment. So if you’re looking for some relief now but expect you can pay more in the future, the graduated plan could be right for you.
5. Deferment or forbearance
Let’s say your budget is extremely tight and you’re struggling to make payments at all. But you don’t want to miss a payment, since going into default could lead to wage garnishment, tax refund offset, and long-term damage to your credit score.
In this case, you might be able to postpone your student loan payments through deferment or forbearance.
To qualify for deferment, you must be experiencing financial hardship, have returned to school, or meet another requirement. For forbearance, your monthly payment must exceed 20% of your income, or you have another qualifying reason.
Both benefits let you pause payments for a few months without going into default, which can be a helpful break from student loan payments until you get back on your feet.
But in most cases, interest will continue to accrue on your loans, meaning you’ll face a bigger balance than before the deferment or forbearance began. Before pausing payments completely, consider whether an income-driven plan would be the more helpful option.
6. Making extra payments
Although most of these plans lower your monthly payments, you might have the opposite goal: paying more so you can get out of debt ahead of schedule.
If you’re able to throw extra payments at your loans, you could shave years off your term and save hundreds or even thousands of dollars in interest. If you’re able, you can make extra payments at any time through your online account.
That said, some borrowers have run into problems with their student loan servicers applying their extra payment wrong (e.g., applying it to interest when you wanted it to pay down your principal).
So keep an eye on your account to make sure your extra payments are being applied correctly, and call your loan servicer if you spot a problem.
Student loan repayment plans for private student loans
Although federal student loans have a variety of repayment options, private student loans aren’t always so flexible. When you take out a private loan, you borrow from a bank, credit union, or online lender.
And it’s up to each lender what repayment plans and protections they’ll offer to borrowers. Some will let you pause payments for a few months if you lose your job or go back to school. Others let you skip a payment or two if you’re struggling to pay.
And as with federal student loans, you can always make extra payments without penalty. If you’re looking to make changes to your private student loans, speak with your lender or loan servicer about your options.
Consider refinancing for new terms and a lower rate
Although you can’t necessarily change your private student loan repayment plan, you can restructure your debt through student loan refinancing.
When you refinance, you give one or more of your old loans to a new lender, such as a bank or credit union. That lender then issues you a new loan in their place with a single monthly payment. At this point, you can choose new terms, often between five and 20 years.
Choosing a short term could mean higher monthly payments, but it will get you out of debt faster. Conversely, a long term lowers your monthly payments, which could be useful if you need to free up more of your budget for travel. But remember, a long term also means you pay more interest overall.
You can refinance both private and federal student loans. You’ll need decent credit and income to qualify, or you can apply with a creditworthy cosigner. Depending on your credit score, you could qualify for an even lower interest rate than you have now, thereby saving money on interest.
If you’re interested, it’s easy to get a rate quote from multiple lenders with a refinancing marketplace like Credible or LendKey. This rate quote doesn’t require any commitment, and it won’t impact your credit score. You’ll only submit a full application (and consent to a hard credit check) if you find an offer you like.
Note this major con of refinancing federal student loans
Before refinancing, though, remember this: Refinancing federal student loans turns them private. As a result, you lose access to federal repayment plans and forgiveness programs forever. Your new refinanced student loan won’t qualify for any federal protections.
And private lenders don’t offer as much flexibility if you need to change your plan or adjust your monthly payment (unless if perhaps, you refinance again). So before sacrificing federal benefits, make sure you don’t need any now or in the future.
As long as you understand what you’ll be giving up, refinancing could be a savvy way to restructure your debt and potentially lower your interest rate. But try to start the process before you leave the country, since it can take a few weeks before your refinanced student loan is up and running.
You can manage your student loans from anywhere
Although student loans can be a huge burden, they don’t have to hold you back from pursuing your dreams or traveling the world. But you also don’t want to ignore your debt and hope they go away on their own (unfortunately, that’s very unlikely to happen).
So before you leave the country, take the time to learn about your repayment options and choose the right one for your finances. And if your budget allows, put your loans on autopay so you never miss a payment.
By putting in the legwork now, you can enjoy your travels without worrying about what’s happening with your debt back home.
And if you move somewhere with a low cost of living, you might even be able to pay your student loans off ahead of schedule.