Your Student Loan Repayment Options

A variety of student loan repayment plans are available to fit your financial situation.

When it comes time to repay your student loans, you'll be glad 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.

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.

Keep in mind that you aren't locked into the method you choose -- the holder of your federal loan must let you change repayment plans at least once per year.

Different rules apply to federal and private student loans. The options discussed in this article are available for federal loans. If you don't know what type of loan you have, you can find out by visiting the National Student Loan System's website ( www.nslds.ed.gov) or by calling 1-800-4-FED-AID.

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 (not including deferments and forbearances).

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. Although payments vary over time, the loan still must be paid over a period of ten years.

With any graduated repayment plan, you'll pay more for your loan over time than you would under a standard plan. 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.

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 up to 25 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. To be eligible for this plan, you must have an outstanding loan balance of more than $30,000.

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.

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 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.

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. Consolidating your loans may increase the amount of interest you pay over the life of your loan. 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 and you don't qualify for a postponement.
  • You want to refinance at a lower interest rate. This will be harder to do now that interest rates on most student loans are fixed.
  • You want to get out of default fast so that you can qualify for new loans and grants to attend school.
  • You don’t have loans through the government’s Direct Loan program, but you want to get access to the income contingent repayment plan.

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.

With only a few exceptions, once you get a consolidation loan, you can’t consolidate again. So be careful and make sure you get the best deal possible.

Loan consolidation has become popular in recent years, and many lenders market it aggressively. Be sure you explore the options available to you and understand the terms of any consolidation loan before you agree to one. The Federal Direct Consolidation Loan Information Center's website ( http://loanconsolidation.ed.gov) is a good source of information.

Loan Deferment or Forbearance

If your loan payments are enormous or you've fallen on hard times, even the most flexible payment plan might not help ends meet. In many circumstances it's possible to temporarily postpone making your loan payments or reduce the amount of your payments. These periods of relief are known as deferments (during which the government pays your interest) and forbearances (during which the amount you owe keeps going up because interest isn't being paid).

If you are unemployed, attending school full time, or experiencing "economic hardship," you may be able to get a deferment or forbearance. At the first sign of trouble, call your loan holder and explain that it's impossible for you to make your monthly payments; you can explore your options for deferment or forbearance with the loan holder's representative.

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