There are a number of options available to repay your federal student loans. The repayment plan chosen will be determined by expected income and future income. Repayment plans can be changed each year or even more often in certain circumstances. It will be necessary to get in touch with your lender if you need to change your student loan consolidation repayment plan.
Below the various repayment plans for federal student loans are discussed.
The Standard Repayment Plan
If you can afford this plan, it is the best option to get your loan paid off as quickly as possible and with the lowest amount of interest. The standard repayment plan will have the best possible interest rate and is usually set up for repayment in 10 years or less. $50 is the smallest monthly payment possible. For those finding a good paying job right out of college, this is the best option. 10-15% of monthly income is a reasonable amount for monthly payments. You are most likely in financial difficulty if your monthly payments are 20% of gross income or higher.
Extended Repayment Plan
This option extends your payments out over a longer period giving you lower monthly payments than the standard. Of course this means you will be paying more interest over the life of the loan and thus more for your college education. Depending on the amount of the loan, with this plan the balance is normally paid off in anywhere from 12-30 years. It only applies to loans over $30,000, and it is not applicable for FFEL loans from before Oct 7, 1998.
Graduated Payment Plan
If you start out your working career with a modest income that you expect will grow in the future, this plan might give you the flexibility you need. Payments are increased every two years after starting the loan repayment with low monthly amounts. Payments can be as low as $25 per month, but the payment must cover the interest being earned by the lender on the loan. Also, the payment can be no less than 50% of the standard plan and no more than 150% of the standard plan.
The Income Based Repayment Plans
There are several repayment plan options that base monthly payments on the amount of income you earn. You need to keep accurate records of income and tax information because these plans are recalculated each year.
It was the intent of Congress to encourage people to go into lower paying career fields like public service. In fact the Income Based Repayment Plan (IBR Plan) will forgive the debt that remains after 10 consecutive years of being employed in public service. Certainly this is a big incentive.
There are other income based plans including the Income Sensitive Repayment Plan (ICS Plan) for FFEL loans and the Income Contingent Repayment Plan (ICR Plan) for Direct loans. The basic idea behind these plans is to offer repayment options that borrowers can afford. The ICS and ICR plans have provisions such that the loan balance can be written off in 25 years, but that amount is counted as taxable income in the year the loan was dismissed.
The goal of these repayment plans for a consolidated federal stuent loan is to permit borrowers to come up with monthy payments they can afford. The plans are very flexible and allow for the borrower to change repayment plan fairly often if necessary. Despite this a lot of people owing student loans manage to default causing enormous problems for themselves with their credit ratings which takes them years to repair. It is unfortunate that many young people who borrow money for college are not sophisticated about financial matters and don’t really understand what can happen to them if they take on debt they cannot handle. You are advised to be aware of your options for paying off your federal student loan consolidation, to make your monthly payments on time, and to pay off your loans and get on with the rest of your life.
Always remember there is no way to get out of a student loan by declaring bankruptcy. You can find lots more information about student loan consolidation and student debt at Student Debt Consolidation.
