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What You Need To Know About Federal Student Loan Repayment

What You Need To Know About Federal Student Loan Repayment

April 09, 2022

Want to pay off student loans in the most efficient way possible? Unfortunately, the time of student loan refinancing rates being at an all-time low is fleeting and we need to look to other ways to repay student loans in the future. The secret takes a little bit of common sense, and a little bit of math. Here’s what you need to know, and what it means for your student loan repayment:

The first thing to consider when paying off your student loans is how large your balance is. If you have a small student loan balance you should pay that off as quickly as possible. For larger balances, it is often suggested to use an income-driven repayment model, but the best strategy is actually to combine the two methods when paying off federal student loans.

The federal government provides student loan relief for those that set up income-driven repayment plans. Loan balances can be forgiven for undergraduate student loans after 20 years and for graduate student loans after 25 years. There are several options to choose from, and recent statistics show that 1.4 million student loan borrowers were unknowingly enrolled in the wrong student loan repayment plan, so step one would be to find the one that’s right for you. There are plenty of resources out there, but an example of one that I found useful is mentormoney.com.

Once you’ve selected which income-driven repayment plan to enroll in, you need to determine the “critical horizon,” which is defined as the point in time at which the benefits of forgiveness match the cost of compounding. This is where the math comes in. Your objective should be to pay off student loans as fast as your cash flow needs allow, and once you reach that “critical horizon,” enroll in an income-driven repayment plan. After that, you should pay the minimum payments every month until you get the student loan forgiveness from the federal government. The goal is to minimize compounding interest costs and maximize student loan forgiveness.

As always, feel free to reach out to our team with your questions and for assistance with finding the right solution for your situation.


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