Student loan repayment. It’s a topic as unavoidable as it is disliked, but it’s time to consider that fact that we’re at least partially to blame for that. After all, there eight different plans for Federal Student Loan repayment, yet two-thirds of borrowers are on the standard repayment plan. If you’re looking for ways to make your payments more manageable, here’s what you need to know.
Standard and Graduated
Odds are you’re probably already on the standard plan, and you have likely heard of the graduated plan. They operate on the same general principles. With a standard plan, you make a set monthly payment throughout the life of your loan until your debt is eliminated. With the graduated plan, you start with a smaller payment, which increases every two years. Neither qualify for public service loan forgiveness after 10 years, and since you have to pay the debt off in full, there is no cancellation for outstanding debt. The standard is what you will default to unless you select another payment plan. The graduated might make sense if you know your income will go up, as happens with many management training programs and certain STEM jobs.
Extended And Income-Based
Here is where you should start paying attention. The extended plan offers some relief to those with greater than $30,000 in loan balance, while the income-based plan is open to all who have partial financial hardship, defined as having a standard loan payment that exceeds 10% of your discretionary income. These plans charge no more than 10% to 15% of your annual discretionary income, and the payments go up only as you start to make more. The income-based plan takes things a little further. On it, your payment will never be more than under the standard plan, and it qualifies for both public service loan forgiveness after 10 years, and the cancellation of any outstanding debt after your 20 or 25 year payment period has ended. These plans require a bit of diligence, since your payment rates will be re-assessed every year, but they can be incredibly helpful for high debt, low income, or a combination of the two.
Pay As You Earn and Revised Pay As You Earn
These plans are open to direct loans only, though qualifying pay as you earn loans must be from after 2007, and must have partial financial hardship. Under these plans, payments will be set at 10% of your discretionary income, and change based upon your earnings. Like the income-based plan, they both qualify for public service loan forgiveness and outstanding debt cancellation after the payment period has ended.
Income-Contingent and Income Sensitive
While the income-sensitive plan is open only to FFEL program loans, the income-contingent plan is open to all loans. On the income contingent plan, you pay either 20% of your discretionary income or what you would pay on a twelve-year fixed payment plan, whichever is lower. You would also qualify for public service loan forgiveness and cancellation after the 25 year payment period has ended. With income-sensitive plans, your payments are based on your annual income as determined by your specific lender’s formula. There is no loan forgiveness or cancellation on income-sensitive plans.