When it comes time to start repaying your student loan(s), you can select a repayment plan that best suits your financial situation.
Currently there are six (6) primary student loan repayment options available. With the majority of student loan programs now consolidated under the federal umbrella, changes in repayment options, eligibility for forgiveness, and other repayment changes may occur more frequently as politicians are now directly in charge of the programs and may find it expedient to produce new options in order to appeal to voters.
Therefore it is always important to keep abreast of changes, for example in 2010 congress passed laws for new origination that occur after July 2014 that changes Income Based Repayment plans and reduces forgiveness rules of certain options from 25 years down to 20 years, depending on eligibility.
This is the ideal plan, assuming a person can afford the payments. The standard repayment option is a simple 10 year fully amortized monthly payment plan with minimum payments of $50.
The upside to this option is that the loan is eliminated quickly, within 10 years, and the overall cost of the loan and interest expense to the student is minimal. The downside is the payment on a 10 year plan is the highest monthly payment of any of the the repayment options.
This plan features a fixed or graduated fully amortized monthly payment plan that uses the life of the loan as 25 years. The upside of this program is that the monthly payments are lower than the standard plan with the downside being that the overall cost of the loan is higher due to interest expense charged for 25 years and not the 10 years that it would be for the Standard Plan.
To qualify for the Extended Repayment option you must have over $30,000 in outstanding debt due to each particular loan program that you subject to the plan.
For example, if you owe $30,000 to Federal Family Education Loans (FFEL) and $15,000 to Direct Loans then only the FFEL loan can be placed on extended repayment, the Direct Loan balance would have to be paid using another option. If either or both balances are below $30,000, even if the sum of the two is above $30,000, neither are eligible for the extended repayment option.
The Graduated Repayment option is a hybrid of the Standard Repayment plan. This program amortizes the loan over 10 years with the payments in the beginning lower than the payments toward the end of the loan period.
This program was designed under the assumption that the borrowers income will increase over time and therefore their ability to pay will increase as the underlying payments increase. The payment increases one time every two years and there is a cap on the maximum payment in that it cannot be more than three (3) times the original payment.
This is a solid option for those with a clear career track where they have a reasonable expectation of an increasing income over their career. This plan is similar to the Standard Plan in that it keeps the overall interest expense to a minimum over the life of the loan due to its 10 year maximum term.
Income Based Repayment (IBR)
This option was first introduced in July 2009 and it reflects the realization of the impact that student loans are having on the lives of the borrowers over time. With this program the monthly payment is determined using a calculation that takes into consideration the borrowers family size and income. With these two variables an affordable payment is calculated.
These loans are amortized for 25 years with outstanding balances due after year 25 forgiven. For borrowers that work in public service this plan is eligible for several payment reduction and loan cancellation programs.
This plan is the clear choice for anyone having difficulty in making their student loan payments. All borrowers whose payment under this plan are less than it would be under the Standard Repayment plan are eligible.1
Income Contingent Repayment (ICR)
The ICR option is only available for Direct Loans. The borrowers adjusted gross income is calculated and then factored into family size, and amount due to Direct Loans in order to calculate a monthly payment assuming a 12 year repayment schedule. The payment from this calculation is capped at 20% of monthly discretionary income.
Many times this payment amount does not cover interest accrual and therefore unpaid interest is added to the loan balance and recast into the principle each year. This new principle amount is then used in the monthly payment calculations for the next year. After year 25 any outstanding amount due is discharged. Discharge is different than forgiven in that when discharged a person is normally responsible for paying taxes on the amount of the discharge.
Income Sensitive Repayment (ISR)
This plan is available for loans distributed through the FFEL program, which was discontinued (see highlight below). The ISR is similar to the standard prepayment plan in that the loan will be paid in full within 10 years. The difference being that this plan allows for annual payment adjustments relative to changes in actual annual income for the borrower. Even with payment adjustments, this plan does adhere to the 10 year maximum loan term.
As a result of the SAFRA Act, no further loans will be made under the FFEL Program beginning July 1, 2010. All new Stafford, PLUS, and Consolidation Loans will come directly from the U.S. Department of Education under the Direct Loan Program.2