Student loan repayment options come into play when it’s time to pay back the debt you’ve accumulated in college. There are quite a few different options, each one set to meet different needs and requirements. Three types that fit under the umbrella of federal repayment loans include direct consolidation, income-driven repayment, and basic.
One option the Department of Education offers is Direct Consolidation. If you have several different loans, this provides you with the opportunity to combine them. It makes it simpler to repay, resulting in one monthly payment and one loan holder. However, before deciding to consolidate, you will want to look carefully into your options as well as the advantages and disadvantages it provides.
Basic Repayment Plans
Basic repayment plans include standard, extended, and graduated. Standard is the original loan terms you agreed upon after borrowing. People generally do not prefer these to income-driven repayment plans. However, they may work for some, especially those who do not wish to reapply every year for income-driven plans.
Extended plans are the way to go if your standard payments are too high. However, it will increase the term length to 25 years. Monthly payments will be lower and you can choose from fixed payments or payments that increase over time.
Graduated plans are also a choice when standard payments are beyond your means and are similar to income-driven plans. The monthly payments start low but increase steadily over the 10-year loan term.
Income-Driven Repayment Plans
Income-driven repayment plans are exactly as it sounds: your income determines your payment every month. Based on a percentage of your income, the original loan term of 10 years increases up to 25. At the end of 25 years, all remaining balance will be forgiven, but taxes will still be required on the forgiven amount.
The four types of income-driven repayment plans include: Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn, and Income-Contingent Repayment.
Income-Based Repayment is the best choice if you have a high debt to income ratio. The payments will cap at about 15% of your total income, but the size of your family will determine if you are eligible for this plan.
Pay As You Earn is also for people with high debt to income ratios. However, you can only qualify for this plan if you borrowed before September 30th, 2007 and again after September 30th, 2011. Many will not qualify for this. But, it is a good choice that requires lower monthly payments if you are eligible.
Unlike the previous two, Revised Pay As You Earn is for all income levels. Your loan term depends on your degree level, but all payments will be capped at 10% of your salary. However, for married people, the plan takes both salaries into account.
Income-Contingent Repayment is solely for parents who borrowed with a federal PLUS loan. This plan is perfect for parents who can’t afford the standard monthly amount, but would like to pay more than the previous three ask for: Income-Contingent asks for 20% of their salary a month. The term also extends to 25 years.
For applicants hoping to receive an income-driven repayment plan, remember that you need to reapply every year, but you can change your plan whenever you wish.
As with any part of the federal loan process, it is important to do your research and take a close look at your family dynamics, salary, job expectations, and more. You can always contact your lender for more information on the options available to you.
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