College education is expensive and most American students seek for student loans to cover the cost of their college expenses and that includes books, accomodation, tuition costs that can quickly accumulate resulting in debts that lingers long after graduation. Knowing how to navigate the complexities of student loans is crucial to making informed decisions especially when faced with an enormous amount like $40,000. Additionally, this will reduce post graduation financial burden often faced by students who obtained loans to fund their college education.
Factors affecting student loan repayment
Before considering ways to repay your student loan, it is vital to understand the factors that can affect monthly repayment. These factors include:
Interest rate
This is the percentage of your loan amount which you will be charged by the lender, in this case, the government, for the amount borrowed. The interest rate is of two types, fixed or variable based on the type of loan. For fixed interest rates, the amount remains the same throughout the loan term. However, for variable interest rates, it is the complete opposite, it can change overtime resulting in fluctuations in monthly payments.
Loan term
This is the duration you agreed to repay your loan. The standard repayment plan is 10 years, however, this can be extended to 20 or even 25 years, depending on the option you choose. The duration of the loan term has a significant impact on your monthly repayment amount and interest rate.
For example, shorter terms results in higher monthly payment but less interest compared to long terms which require less monthly payment but more interest.
That means, for a $40,000 loan with a 5% fixed interest rate over a 10-year term, your monthly payment will culminate to approximately $424.
Repayment plan
Another factor you must consider when repaying your student loan is your repayment plan as this can, to a great extent, affect your monthly payment amount, duration and interest rate.
Monthly payment for a $40,000 student Loan
To calculate your monthly repayment for a $40,000 student loan, you need a payment plan.
Standard repayment plan
This is one of the common forms of repaying your student loan. Under this plan, you will be required to make a fixed monthly payment over a 10-year period with interest rate ranging from 3.73% to 6.28%, based on when your loan was disbursed.
Examples on different interest rates on a $40,000 loan:
Loan term: 10 years.
Interest rate: 3.73%
Monthly payment: $400
Interest rate: 5%
Monthly payment: $424
Interest rate: 6.28%
Monthly payment: $450.
The plan is a good option for those who can make payment consistently to pay off their debt in no time.
Graduated or Income Driven Repayment plan (IDR)
This repayment option is ideal for students who have more flexibility. Your monthly payment is calculated based on the percentage of your disposable income. This makes it more affordable to low income earners. Examples of IDR are Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). This plan starts with lower payment that increases every two years.
For example if you earn $50,000 each year and are single, you can pay as low as $200 to $300 per month. However, as your income increases so will your monthly payment.
Extended Loan Repayment
This kind of loan repayment plan is also designed for students who need lower monthly repayment. The loan term for this kind of payment can last as long as 25 years thus reducing your payment monthly.
However, the interest is high. For a $40,000 loan at 5% interest rate with the term extending as far as 25 years, the monthly payment can be as low as $233 but with high interest.
Learn about subsidized and unsubsidized student loan.
Check how much you have to pay according to the amount of the student loan:
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