Student loan repayment options come into play when it’s time to pay back your debt in college. There are quite a few different options, each one set to meet different needs and requirements. First, we’ll cover the different routes for repaying student loans in general terms, and then we will dive into the different repayment plans available for federal and private student loans so you can help determine which is the right option for you.
Your Options for Repaying Your Student Loans
Before we get into federal vs private repayment plans, let’s cover the basic terms and options when it comes to repaying student loans. Understanding these terms is essential to choosing the loans that are right for you before you even start school!
1. Defer Principal and Interest While at School
Some student loans come with the option of deferring payments until you’ve left school or graduated. Direct subsidized loans, for example, have their interest covered by the Department of Education as long as you are in school + 6 months after you leave. However, deferring payments on other loans, including direct unsubsidized loans, can mean your interest is piling up the entire time you attend school.
2. Pay Principal and Interest While at School
Students also have the option to pay down their loans, both the principal amount and the interest, while they’re still at school, even with federal loans. You need to start repaying as soon as you take out the money.
3. Pay Interest Only While at School
Paying interest only while at school means you only pay the interest you’re accruing, but not making any payments towards the principal amount. Some private lenders can offer this.
4. Pay Partial Interest While at School
If you’d like to get ahead of your loans, but don’t have the money to pay off all the interest you’re accruing, there are options for paying partial interest, too. Every little bit will help if the interest is adding up while you’re at school! Private lenders may offer this option.
Types of Loan Repayment Options
1. Direct Consolidation
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.
2. 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.
3. 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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