There’s no one-size-fits-all approach when it comes to paying off student loan debt. You need to know what works for your personal situation. What helps one person could actually harm someone else.
Here are five common pieces of advice that don’t always pan out so well for borrowers. Read on to learn what’s wrong with these student loan tips and what you should do instead.
1.Switching to an income-driven repayment plan saves you money
If you have federal student loans, switching to an income-driven repayment plan can help lower your monthly payments. There are four income-driven repayment plans and each caps your monthly payment at 10 to 20 percent of your discretionary income. If you’re struggling to make your current payments, one of these plans could ease the burden.
But switching to an income-driven repayment plan also has downsides. To lower your monthly payments, these plans extend your repayment term to 20 or 25 years. Adding a decade or more to your standard repayment plan means you’ll pay a lot more in interest over the life of your loan.
After you make payments for 20 or 25 years, the remaining balance of your student loans is forgiven. It’s not free money though — the forgiven amount will be treated as taxable income. So even if your debt is forgiven, you could be hit with a hefty tax bill.
So before jumping onto an income-driven repayment plan, assess your financial needs. Perhaps you can increase your income or lower your cost of living to better afford your student loans. Maybe you can qualify for a student loan repayment assistance program.
If you can find a way to stay on the standard 10-year repayment plan, you could save a lot of money in the long run.