Communicated Content – The burden of student loan payments can last for decades of a borrower’s life. For those that are self-employed, the journey out of student loan debt can be especially challenging. Luckily, there are a few financial strategies that can help self-employed borrowers repay their student loans, such as income-based repayment plans, making additional payments or student loan refinancing.
The first thing to note is how loan servicers decide your repayment amounts month-to-month. The standard calculation looks at the amount that you owe, the size of your family, including dependents, and your income, specifically the discretionary amount.
What Makes Self-Employment Unique
If you’re self-employed, your monthly income predictability and stability are likely more variable than borrowers who are W-2 workers. This has significant implications for student loan debt repayment. The consistent income of a 9-5 job can help determine a standard monthly payment, and some employers even offer student loan repayment assistance as a benefit. Unfortunately, self-employment does not come with the same upsides. When your income varies month to month, it’s difficult to base repayment on a set income.
Additionally, trends can vary year-to-year depending on the nature of your business or industry, which means your monthly payment plans may need to be adjusted more frequently. However, if there is a lull in business, you may be able to contact your loan provider to discuss the terms of your loan.
Choose an Income-Based Repayment Plan
The federal government offers several income-based repayment plans that are calculated based on your earnings. For people with variable earnings, such as many self-employed individuals, this number tends to be set by tax returns. This can be a great strategy for business owners or people with enough cushion in their earnings, but it can still be difficult if your income varies month-to-month. Try to build up a savings account cushion to add some balance to uneven earnings.
Maximize Windfalls
There are two ways to get the most out of a big windfall when it comes to student loan payments.
- If you’re comfortable making your monthly payments, try paying over the minimum payment requirement using the additional funds as an extra contribution directly toward the principal.
- If you have some seasonality to your business and are able to predict when your lower-income months will be, put windfalls towards an emergency fund that you can tap into during those times.
Consider Refinancing
Another option to consider for restructuring your student loan payments, as well as potentially lowering your interest rate, is student loan refinancing. Refinancing can help to lower your monthly payment amount, and either shorten or lengthen your payment term depending on your needs.
For example, if you can negotiate a lower interest rate, your monthly payments could be lower and you could also pay less during the life of your loan. Depending on your goals, you may prioritize paying off your student loans aggressively to get out of debt faster or extend your loan term to lower your current monthly payment. Either way, refinancing may offer more flexibility.
Final Thoughts
In general, repayment for your loans as a self-employed individual will likely require more planning and more thoughtful budgeting. Speak with your loan servicer to understand what repayment options are available to you as you anticipate income volatility that can come with self-employment and plan your budget month-to-month and year-to-year.
