There are several options to consider when you are trying to decide the best way to repay student loans. Most repayment plans have different requirements and features, making the decision process a bit overwhelming. Today we are comparing two ways to repay your loans: Income Based Repayment (IBR) for federal loans and student loan refinancing with PenFed.
There are four different income-driven repayment plans available for federal loans: Revised Pay As You Earn (REPAYE), Pay As You Earn (PAYE), Income Based Repayment (IBR) and Income Contingent Repayment (ICR). While each of these plans allow you to make a monthly payment based on your income, there are different qualification requirements, repayment terms and payment amounts to consider. A lower monthly payment may be a more comfortable option, but income-driven reductions to your monthly payment come at a big cost: a corresponding increase in the interest you pay over the life of the loan. On any income-driven plan, you'll also need to recertify your income and family size each year, even if nothing has changed.
IBR plans are best for borrowers in public service or those who cannot afford to pay more than 10% of their income now. We don't recommend signing up for IBR if you can make higher monthly payments. 20 years is a long time to be in debt and it will save you a lot of money to make a higher monthly payment at a lower interest rate. Loan forgiveness is a tempting offer, but don't jump in too quickly until you know what you are signing up for.
The main benefit of student loan refinancing is getting your loans on a lower interest rate and more favorable term. In general, it will cost you a lot more over the lifetime of the loan to stay on an IBR plan due to the interest costs you pay over 20 or 25 years. The only way to lower the interest rate on federal loans is by refinancing to a private loan, because federal rates are set when you take out your loan. Student loan refinancing has different eligibility requirements than federal income-based programs. To qualify, you generally need to have good to excellent credit, achieved your degree, and be employed. You can refinance federal and private loans with PenFed, but you don't have to refinance all of your loans – you can just pick the ones you want a lower rate on. When you refinance, you also consolidate your loans to the same rate and term, with one monthly payment instead of several.
Refinancing is best for borrowers who don't need or qualify for IBR benefits, or those who can make monthly payments on a shorter term to get out of debt faster. Refinancing is about making your monthly payment work harder for you. With a lower interest rate, more money goes towards the balance of the loan and isn't eaten up in interest costs.
It's important to consider the best option for your situation. Loan forgiveness may be a tempting option for those in public service, but paying tax on the forgiven balance is a surprise to many borrowers and can cancel out the benefit that forgiveness offers in the first place. Remember, once you refinance federal loans to private loans, you cannot switch back. Faster loan repayment can also have the psychological benefit of one less burden to worry about. Refinancing can get you out of debt years sooner, which not only saves you money, it saves your sanity. To see what you can save, use our Find My Rate tool to check your rate and apply.