Understanding Federal Student Loan Repayment Plans

  3/20/2014 by    in Student Loan Repayment   Comments Off on Understanding Federal Student Loan Repayment Plans

Student Loan Repayment PlansIn a few short weeks, many college students will be taking their last exams and preparing for graduation. It’s a time of celebration and trepidation, as many make the transition from attending classes to actively seeking employment. The responsibilities of being a full-fledged adult are just now coming into focus, as they prepare to leave campus and head out into the real world. Many big decisions lay ahead, including one that may not be at the top of their priority list – repaying their student loans. I know it may seem like there’s plenty of time before that first bill comes due, but it will be here before they know it. Now is the perfect time to for students to review their repayment options and determine which will be the best fit. Here is a brief overview of all seven federal student loan repayment plans.

Standard Repayment Plan

Students are automatically enrolled in the Standard Repayment Plan, unless they request another option. Those selecting this option will have fixed monthly payments of $50 or more. If payments are made on time, the loan will be repaid in 10 years.

Pro: Shortest repayment period and less interest paid over the life of the loan.

Con: Higher monthly payments than other plans.

Eligible loans: Direct Subsidized/Unsubsidized, Federal Stafford Unsubsidized/Subsidized, and all PLUS Loans.

Graduated Repayment Plan

The Graduated Repayment Plan allows students to start out with lower payments that increase gradually over time, usually every two years.

Pro: Loan will be paid off in the same amount of time as the Standard Repayment Plan (10 years).

Con: More interest will be paid over the life of the loan.

Eligible loans: Direct Subsidized/Unsubsidized, Federal Stafford Unsubsidized/Subsidized, and all PLUS Loans.

Extended Repayment Plan

Students will have up to 25 years to pay off their federal loans under the Extended Repayment Plan. They may choose between fixed or graduated payments.

Pro: Smaller payments over time.

Con: Must have at least $30,000 in Direct or Federal Family Education Loans (FFEL). The loan will take longer to pay off and will accrue more interest over time.

Eligible loans: Direct Subsidized/Unsubsidized, Federal Stafford Unsubsidized/Subsidized, and all PLUS Loans.

Income-Based Repayment Plan

Under the Income-Based Repayment Plan, students will pay no more than 15 percent of their discretionary income (adjusted annually) per month, and they will have up to 25 years to repay the debt.

Pro: Any remaining balance after 25 years may be forgiven, or after 10 years for those in eligible public service positions. Payments are lower than most plans.

Con: Must qualify for a partial financial hardship to receive this option (reviewed annually). Any portion of the debt that is forgiven is subject to income tax (excluding those under public service), although President Obama recently proposed key changes to the Income-Based Repayment Plan that would make loan forgiveness tax free.

Eligible loans: Direct Subsidized/Unsubsidized, Federal Stafford Unsubsidized/Subsidized, all PLUS Loans made to students, and federal consolidation loans made to students.

Pay As You Earn Repayment Plan

Students selecting the Pay As You Earn Repayment Plan will have their monthly payments capped at 10 percent of their discretionary income (adjusted annually).

Pro: The debt may be forgiven after 10 years (public service) or 20 years. Interest isn’t capitalized for those who have a documented financial hardship.

Con: Students who graduated prior to October 1, 2011 typically don’t qualify. Students must also requalify each year. More interest is paid over the life of the loan and any portion forgiven is subject to tax (excluding those under public service).

Eligible loans: Direct PLUS and Direct Consolidation loans made to students.

Income-Contingent Plan

Payments under the Income-Contingent Plan are calculated based on income and the total amount of the loan(s). Students have up to 25 years to pay off the loan.

Pro: Any remaining debt after 25 years may be forgiven

Con: Students will pay more interest over the life of the loan and taxes on any portion that is forgiven(excluding those under public service).

Eligible loans: Direct Subsidized/Unsubsidized, Direct PLUS to students, and Direct Consolidation to students.

Income-Sensitive Repayment Plan

Under the Income-Sensitive Repayment Plan, students who do not qualify for the Income-Contingent Repayment Plan may make payments based on their income, but must pay back the loan within 10 years.

Pro: Payments are lower than the Standard Repayment Plan.

Con: The lender determines the payment amount and students pay more interest over the life of the loan.

Eligible loans: Federal Stafford Unsubsidized/Subsidized, FFEL PLUS, and FFEL Consolidation loans.

Students who have a Perkins Loan do not have the same options as those under other federal student loan programs. To understand what repayment plans may be available to them, students should contact their school for further information.

Direct Subsidized and Unsubsidized federal student loan repayment begins six months (grace period) after students graduate, leave college, or fall below half-time enrollment.  While repayment of PLUS Loans for Parents begins once the loan is fully disbursed, a parent may contact their loan servicer to request that the loan be placed into deferment while their child is enrolled at least half-time and for an additional six months after the student ceases to be enrolled.  PLUS Loans for Graduate and Professional Students are automatically placed in deferment during the time in which they are enrolled at least half-time and for six month after half-time enrollment ends.  Perkins loan borrowers enjoy a 9 month grace period before repayment begins.

t’s important that students understand their repayment options and contact their loan servicer to determine which plan works best for their situation. If they have not found suitable employment by the end of their grace period, students need to talk to their loan servicer about about their financial situation and ability to repay.  Options like deferment or forbearance are available to avoid defaulting on their loans.  Plus, students can switch repayment plans at any time if the current plan isn’t working for their particular situation.

About Tamara Krause

Tamara is the Social Media Coordinator and a regular writer for eStudentLoan.com, ScholarshipExperts.com, and CampusDiscovery.com. She enjoys helping students prepare for college. As a mother of four, Tamara has first-hand experience with many areas of education, including special needs (autism), the International Baccalaureate program and post-secondary education. She enjoys speaking at schools and mentoring others online. In her free time, Tamara enjoys volunteering and supporting her favorite football team, the Jacksonville Jaguars.

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