Student Loan Repayment Plans

Student Loan Repayment Plans

There are currently six different repayment options for borrowers in or entering into repayment. These plans share some benefits while other benefits may be plan specific. Understand the all to guarantee that you are doing yourself the greatest good in choosing a plan that is most comparable with your current family and economic situations.

Standard Repayment Plan:  Monthly payments when on a standard repayment plan are based on the number of years you will be in repayment (term) and your loan balance. The term of repayment on a standard plan may be as short as 10 years, but it may not exceed a term of 30 years. The term is based on the loan balance. In some cases, a standard monthly payment truly is the best option for repayment. Choosing the standard repayment plan may allow you to pay your loan off sooner and offers a fixed rate for each monthly payment. If your loan balance is very small, standard payments may even be the lowest payments for the shortest term.

Although the monthly payments are not income based, Direct Consolidating your loans  may reduce your monthly payments by 50 or more. A Direct Consolidation also allows you to transition easily into any other repayment option if your income were to at any point be reduced or your family size grew higher than your income is able to provide for as determined by poverty level guidelines.

If your monthly payments do become a financial difficulty for you, please be sure to get qualified into an Income Driven Repayment option to avoid any all consequences of a delinquent loan. Direct Consolidation and Income Basing your payments may help you avoid default and decrease you monthly payments in a time of need. IDR options can even reduce your payments to $0/month by calculating your income and family size. These rates are provided for 12 months (1yr) at a time.

Graduated Repayment Plan: Like the Standard monthly payment plan, a Graduated Repayment Plan may provide a term of payment as short as 10 years and not to exceed 30 years. Terms over 10 years are considered either an extended standard or extended graduated when on a traditional repayment plan. Payments are also based on loan balance; however, the first two year in repayment will be payments to interest alone. This allows for lower payments in the first two years of the term and a slight increase in the monthly payments every two years until the loan term is completed.

When making your payments on a graduated repayment plan, you will have paid a higher total over the life of the loan than on a standard repayment plan. This is caused by the principal of the loan not being paid into until years 3 and four of the term. A graduated repayment plan may be best if you do not qualify for IDR’s, or the monthly payments on an IDR would be to high for you because you income is perceived as higher. If you are expecting a regular increase in income over time and can manage higher payments in the future, than the graduated plan may be the option for you to consider.

Pay As You Earn:  The first requirement of the Paye repayment plan is that your Federal Student Loans can not be older than/ taken out before October 1, 2007. President Obama provided this plan as a repayment option in 2012 in an effort to provide income based assistance to more borrowers. Qualifying for the Paye Plan allows monthly payments based on only 10 of your household income and a repayment term of only 20 years instead of the 25 year term of the IBR. The Paye Plan is only offered to new borrowers. This means that the borrower can not have any balance on Direct or FFEL Federal Student Loans at the time that the loan was received. You must be able to show financial hardship based on your household income and family size.

Since your monthly payments will be based on such factors and income and family size, it is important to remember that you must provide income verification every 12 months to continuing in the Paye Plan and receiving its benefits. Income can generally be verified by the previous years tax returns or your two most recent pay stubs. After 20 years of qualifying monthly payments have been made (even if the payments were $0/month) the borrower may be relieved of the loan balance. It is however important to remember that any balance relieved is classified as income and is taxable by the IRS.

Revised Pay As You Earn:  Repaye was created as a revision of the Paye Plan. The Repaye Plan is the newest of IDR options and was started by President Obama in an effort to extend some benefits of the Paye plan to even more students in repayment.  Federal Direct Loans, Stafford Loans, and Graduate Plus Loans all qualify for the Repaye Plan. Monthly payments on Repaye are calculated as 10 of the borrowers household income as in the Paye Plan. However, the Repaye repayment plan offers a term of 20-25 years like the IBR. Loans that are being paid off on this plan do have the option of PSLF with qualifying employment, and also qualify for interest forgiveness and loan relief.

On the Repaye Plan borrowers are allowed forgiveness of the subsidized interest to the loan for the first three years in repayment, and the forgiveness on half the total interest of the loan after three years. Repaye payments also provide the borrower forgiveness of any remaining balance at the end of the term in repayment. Be reminded relief in this form is viewed as taxable income to the IRS.

Income Based Repayment:  On the IBR, your monthly payments will not be more that 15 of your Adjusted Gross Income. This means that base on the ratio for your income and family size (over the poverty line) your monthly payments may be as low as $0. The term on this repayment plan is usually between 20-25 years. On the IBR, the subsidized portion of your interest payments are forgiven for the first three years if your monthly payment is lower than the interest calculated. This has been seen as immediate forgiveness on some interest on the loan. Borrowers generally see forgiveness again at the end of the term if there is a balance to the loan after satisfy the term of the plan with qualifying regular payments (even if the borrower qualified for payments of 0/month.)  Income basing your payments is also necessary if your loans qualify for Public Service Loan Forgiveness due to your employment. It is important to understand that making payments on a standard repayment plan will pay the loans off by the PSLF term of 120 payments. Once Federal Student Loans are enrolled in an IDR and Direct Consolidated if necessary, a former student would make only 120 qualifying payments to have the balance of their loans forgiven. This forgiveness is tax free and many qualify for it but are never able to get the answers they need or assistance in applying.

Borrowers that are married and file a joint federal tax return may be able to have the spouse’s outstanding loan balance assist in reducing the monthly payment. The advantages of the IBR would be for those who suffered a loss or reduction in household income, qualify for a monthly payment that is calculated as less that the monthly interest on the loan or as low as $0/month, or if you do not see your future income at least 150 above the Federal Poverty Limit or qualifying for payments of more than $0/month.

Income Contingent Repayment:  There are two separate calculations used to determine the monthly payment amount on the ICR. The calculation that comes out with the lowest payment is the one that is used to satisfy the monthly payments into the loan. The monthly payments will be calculated by either the borrowers adjusted gross income and family size by 20 or by the balance of the loan and a Federally determined income value.

THE BEST OPTION FOR YOU

Choosing a repayment plan that is suited for youdoes require some research and consideration. There are several options and therefore a plan fitted for any economic and family situation. Rather your goal is to pay the balance off as soon as possible or to have your monthly payments as low as possible, one of the six plans above will accomodate your needs.

The traditional repayment options of a standard or graduated plan provide monthly payments based on the balance of the loan and the term in repayment. These payments are generally higher monthly payments, but do usually allow the borrower to pay the loan off the soonest. Income Driven Repayment Plans will usually dramatically reduce the monthly payments but may increase in years of repayment, meaning the term is stretched out longer. It is important to understand that plans that allow your monthly payments to be based on household income do require annual recertification. This means that on the Repaye, Paye, IBR, and ICR plans you must provide income verification every twelve months. This can usually be done by submitting the previous years income tax return or the two most current pay stubs. It is also important to remember that any relief of the balance of the loan(s) is considered taxable income by the government.