Your Student Loan Repayment Options
The variety of student loan repayment plans available fit different needs and financial situations.
When it comes time to repay your student loans, you'll be relieved to know that many lenders offer a variety of repayment plans -- some of them quite flexible. The plans available to you depend on the types of loans you have.
If you have bank- or government-issued federal student loans -- for example, Stafford loans -- you can choose from several repayment plans designed to make your life less stressful. If you have school-issued federal student loans -- such as Perkins loans -- ask your school about its options for repayment. Private loans, made without federal funds, come with fewer repayment options. (These loans are made primarily to graduate or professional students, and have names such as MedCAP, MBA-EXCEL, ENGAssist or LAWLOANS.)
You may want to pick just one method or, if you have several loans, combine approaches to create the best repayment strategy. To investigate your options, call your lender, loan holder or loan servicer. But don't wait until you're seriously behind in your payments -- if you're in default on your loans, many of these options won't be available to you.
If you're eligible for more than one repayment plan, keep in mind that you aren't locked into the method you choose. The holder of your loan must let you change repayment plans at least once per year.
Standard Repayment Plan
If you can afford the monthly payments, you'll probably want to stick with the original repayment plan offered by your lender. A standard plan carries the highest monthly payment but costs less in the long haul because you pay less interest. Your monthly payment amount and repayment period will depend on your loan balance, but as a general rule you can plan on shelling out $125 per month for every $10,000 you borrowed. You'll make payments for a maximum of ten years.Graduated Repayment Plan
Under a graduated plan, your payments start out low and increase every two to three years. This may be your best option if you are just starting a career or business and you expect your currently modest income to increase steadily.If you got a federal loan directly from the government through the federal direct loan program, your starting payments may be half of what they would be under the standard plan (there is no minimum amount, but your payment can never be less than the monthly interest due). Then they'll increase every two years, for 10 to 30 years. Your monthly payments will never rise to more than 150% of what the monthly payments would be under the standard plan.
Other lenders may require that you pay only the interest on your loans for a few years. Then you'll switch to payments of principal and interest until your loan is paid off. Your repayment period will always depend on the amount you owe; in extreme cases, it may stretch to 30 years.
With any graduated repayment plan, you'll pay more for your loan over time than you would under a standard plan. This happens for two reasons: First, because interest charges are based on your unpaid balance each month, if you keep a higher balance in the early years of your loan, you will pay more in interest. Second, because you're likely to extend your repayment period, you'll be paying interest longer.
Extended Repayment Plan
If you need long-term lower payments, you might consider an extended plan. It lets you stretch your repayment over a period of 12 to 30 years, depending on your loan amount. Your fixed monthly payment is usually lower than it would be under the standard plan, but you'll pay more interest because the repayment period is longer.The federal government and many other lenders allow you to combine an extended plan with graduated payments, which will lower your payments even further -- and increase your overall costs even more.
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Income-Based Repayment Plan
If your income is low or unstable, an "income-contingent" or "income-sensitive repayment" plan may be right for you. As your income rises or falls, so do your monthly payments.The amount of your payment is refigured every year, based on your annual income, household size and loan amount. If you are married and file a joint federal tax return, under current rules your joint income is used to calculate the required monthly payment.
Federal Direct Student Loans. If you have a federal direct Stafford or consolidation loan, you can choose an income-contingent repayment plan. PLUS loans are not eligible. The amount you pay annually will vary, but it will never exceed 20% of your discretionary income -- that is, your annual gross income less an amount based on the poverty level for your household size. (To learn what your maximum payment will be, call the direct loan servicing center at 800-848-0979 or use the online calculator at http://www.ed.gov/DirectLoan/calc.html.)
If your income is very low, you may not be required to pay anything under an income-contingent plan -- or the amount you pay each month may be less than the amount of interest that is accumulating. This may feel like a relief, but as time goes on, your loan balance will continue to grow.
The only relief comes after 25 years -- if you haven't paid off the loan by then (not including periods of deferment or forbearance), the government will forgive the rest of what you owe. Even then there's a bit of a catch: The IRS will require you to report the amount forgiven and pay taxes on it unless you can prove that you are insolvent.
Federal Loans From Financial Institutions. If you obtained a federal Stafford, SLS, PLUS, HEAL or consolidation loan from a financial institution, your lender or other loan holder probably offers an income-sensitive plan. Such plans are similar to the government's income-contingent plan, with a few important differences: There is no provision for loan forgiveness as there is under the government's plan, and because monthly payments must cover at least the accruing interest, the payments will never be as low as those under an income-contingent plan. Also, your monthly payments may be slightly higher, because you must pay your loans in full.
Loan Consolidation or Refinancing
With loan consolidation, you can lower your monthly payments by combining several loans into one packaged loan and extending your repayment period. As with the other low-payment options described above, consolidating your loans may greatly increase the amount of interest you pay over the life of your loan. Occasionally, however, it may be possible to refinance several loans, or just one loan, to secure a lower interest rate.You may want to consider consolidating your loans if:
- You can't afford the monthly payments on your federal student loans, don't qualify for a postponement and aren't eligible for any of the low-payment plans described above. This may be true, for example, if you have older federal loans.
- You qualify for some of the low-payment plans described above, but you are so deep in debt that you still can't afford your monthly payments. This may be true if you have many federal loans, or if you have private loans -- which typically aren't eligible for flexible payment plans or consolidation -- in addition to your federal loans.
- You can afford substantial monthly payments and intend to pay off your loans under a standard ten-year plan, but you want to refinance at a lower interest rate.
- You want to get out of default fast so that you can qualify for new loans and grants to attend school.
Many different lenders, including the federal government, offer consolidation loans. Your repayment options will vary slightly depending on the consolidation lender you choose. Ask potential lenders to help you calculate your payment amounts and overall costs before you make a decision.