There are a number of options available to repay your federal student loans. The repayment plan chosen will be determined by expected income and future income. Repayment plans can be changed each year or even more often in certain circumstances. Contact your lender if you wish to change your federal student loan consolidation repayment plan.
Let’s discuss the repayment plans available for federal student loans.
Standard Repayment Plan
If you can afford this plan, it is the best option to get your loan paid off as quickly as possible and with the lowest amount of interest. The standard plan is normally set up for 10 years or less and will offer the best interest rate of any plan. $50 is the smallest monthly payment possible. For those finding a good paying job right out of college, this is the best option. 10-15% of monthly income is a reasonable amount for monthly payments. You are most likely in financial difficulty if your monthly payments are 20% of gross income or higher.
Extended Repayment Plan
This option extends your payments out over a longer period giving you lower monthly payments than the standard. This translates into paying more for your education because you will be paying more interest on the loan. This plan can pay off your loan from between 12 and 30 years, depending on the size of the loan. This repayment plan is only applicable for loans over $30,000 and does not apply for FFEL loans from prior to Oct 7, 1998.
The Graduated Payment Plan
This plan fits people who will start out their working life with a relatively low starting salary with the expectation of getting good salary increases in the future. Payments are increased every two years after starting the loan repayment with low monthly amounts. Payments can be as low as $25 per month, but the payment must cover the interest being earned by the lender on the loan. There are also other restrictions. The payment cannot be less than half of the standard plan and not be greater than 150% of the standard plan.
Income Based Repayment Plans
Several options exist to set up monthly payments based on the amount of income you earn. You need to keep accurate records of income and tax information because these plans are recalculated each year.
The idea behind these repayment plans was to encourage people to work in lower paying public service types of jobs. In fact the Income Based Repayment Plan (IBR Plan) will forgive the debt that remains after 10 consecutive years of being employed in public service. This can obviously be a huge benefit.
Other plans include the Income Contingent Repayment Plan (ICR Plan) for Direct loans and the Income-Sensitive Repayment Plan (ICS Plan) for loans serviced by FFEL lenders. For people on low incomes or incomes that fluctuate, these repayment plans offer the ability to have an affordable debt load. The ICS and ICR plans have provisions such that the loan balance can be written off in 25 years, but that amount is counted as taxable income in the year the loan was dismissed.
The goal of these repayment plans for a consolidated federal stuent loan is to permit borrowers to come up with monthy payments they can afford. The plans are very flexible and allow for the borrower to change repayment plan fairly often if necessary. Despite this a lot of people owing student loans manage to default causing enormous problems for themselves with their credit ratings which takes them years to repair. In other words they don’t listen to advice given them by parents, councilors and others, and they just have to learn the hard way. Borrowers need to know their options with respect to a federal student loan consolidation, to keep their payments current and to make every attempt to get out from under their student loans and get on with the rest of their lives..
One last comment for those wondering: you cannot get out of a federal or private student loan by declaring bankruptcy. Learn more at Student Loan Consolidation.
