Student loan debt has become a means to an end for many people when they are considering how to pay for the increasing costs of a college education. With the hopes of future earnings to help cover the costs of borrowing money, a student loan can be a great tool to help you get your desired degree and into the career field of your choice. However, while it may seem far off, there will come a time when you have to start making repayments on those loans. You will probably select, or be assigned a repayment plan when you first begin repayment. While each of these plans have different advantages, they also have different qualifying criteria as well.
Standard Repayment Plan
This is the plan all borrows start with. On it, you’ll make equal monthly payments for 10 years. If you can afford this plan, it is probably your best bet because you’ll pay your loan off faster and with a lower interest rate.
Graduated Repayment Plan
All borrowers are eligible for this plan which allows you to gradually increase your repayment plan every two years for up to 10 years (or 30 years for a consolidation loan).
Extended Repayment Plan
This plan might be for you if you can’t afford the payment under the standard plan, and you want the predictability of fixed monthly payments. This plan allows you extended your terms to 25 years, but you will pay more interest over time.
Income-Contingent Repayment Plans (ICR)
These plans are helpful if your debts outweigh your income. With this plans you can switch from the standard 10-year repayment to a 20-year term. Payments are recalculated each year and are based on your updated income, family size and the total amount of your loans. Any outstanding balance will be forgiven if you haven’t repaid your loan in full after 25 years.
Income-Based Repayment Plan (IBR)
This plan will be calculated using 10-15 percent of your discretionary income. Payments are recalculated each year, and are based on your updated income and family size. Any outstanding balance on your loan will be forgiven if you haven’t repaid your loan in full after 20-25 years. However, you may still have to pay income tax on any amount that is forgiven.
Income-Sensitive Repayment Plan
This repayment plan is based on your annual income and can last up to 15 years. Be aware that you’ll pay more over time in interest on this plan than on the 10-year standard plan, but may offer an easier payment in the short term.
Revised Pay as You Earn Repayment Plan (REPAYE)
Under this plan your monthly payment will be calculated by using 10 percent of your discretionary income. These are also recalculated each year and are based on your family size and your income. If you’re married, both you and your spouse’s income will be considered regardless of if you file your taxes jointly or separately. Your outstanding balance can be forgiven after 20 to 25 years if you haven’t paid in full.
Pay as you Earn Repayment (PAYE)
If you were a new borrower on or after Oct 1, 2007, and you have a high debt to income ratio, this might be the plan for you. Payments are based on using 10 percent of your discretionary income and recalculated each year to factor in growing family size and income.
Regardless of what repayment plan you are on, you can always pay extra towards your federal student loans. Be sure to tell your loan service provider to apply extra payments to your balance instead of to your next payment, this will help you pay off the debt faster. As the borrower, you are also able to change your repayment plan at any time, for free. Contact your loan servicer to see which of these options would work best for you and your situation. Before making any changes, do your homework to see what options are available to you and use some of the tools online, to help you better understand your payment and the other terms of your student loan debt.
Kevin Fallon McCarthy
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