by Bruce Mesnekoff
You can choose your repayment plan depending on what kind of student loan you have taken.
There are two kinds of loans: private student loans and federal student loans. Rules are different for both the loans.
Private student loans not being a federal fund, has very fewer repayment options.
Further there are two kinds of federal loans:
Federal family education loan (FFEL): These loans are provided by private lenders that are guaranteed by federal government. This means lender gets reimbursement from federal government, if you default.
Federal Direct loans: They are given directly by federal government.
How repayment plans work?
Repayment plans helps you to reduce students monthly payment, by providing them various multiple repayment programs from which they can select the best that suits. You can even change repayment plans at any time, that too for free!
Private student loans have fewer option of repayment as compared to federal student loan.
Some of the options for private student loan repayment plans are:
Refinance private student loans
The best option you can look for is refinancing and consolidating your private loans. You can refinance your private loans with different banks.
However consolidation of federal loans is done automatically, but it’s not the case with consolidating private student loans. You have to apply and get the approval. On the basis of your credit score approval will be decides.
If repaying student loan is problem for you, you can seek your lenders help. Lender can offer you a few forms of limited relief. You should be aware of the fact that forbearance is short term. In fact, forbearance is subject to lenders approval.
Unlike private student loan repayment plans, federal student loan has many repayment plan options. Student can choose wisely the best for them.
Here are the repayment plan options for students with federal loans:
Standard Repayment Plan
This plan is for all federal subsidized, unsubsidized and consolidated loans.
How It Works: The enrolment in this plan will be done is automatically if you do not opt for another one. You need to pay fixed monthly payments of minimum $50 for up to 10 years. It is best for the one who can afford high monthly payments.
The Pros: You will save on your money as the loan will be repaid sooner than other plans, as a result ending up paying less interest.
The Cons: as compare to other plans, you will have to pay high monthly payments.
Graduated Repayment Plan
How It Works: At first your payments will be lower and will gradually increase usually every two years.
It is best for students who are not able to handle higher monthly payments immediately after graduation but are confident that their income will increase progressively.
The Pros: It allows you to pay off your loan within 10 years.
The Cons: as compare to standard plan, for graduate plan -you will end up paying more interest for the loan.
Extended Repayment Plan
How It Works: This plan allows repayment to be made for up to 25 years. The repayment window for this plan is up to 25 years. The borrower can choose you pay fixed monthly payment or graduated repayment option, where the monthly payment increases over time. The borrower who is having a loan of more than $30000 is eligible for this plan.
It is best for the borrowers, who want to reduce their monthly payments.
The Pros: You will get relief as the monthly payments amount would be smaller, as the loan repayment period is extended up to 25 years.
The Cons: there will be constant burden of payment as the plan is for longer period of time as well as you will end up paying more interest.
Income-Based Repayment (IBR)
How It Works: Your monthly payments will be 10 percent of discretionary income. Payments are recalculated each year and are based on your updated income and family size up to 25 years. To take benefits of this plan your debt amount has to be sufficiently high so as to justify repayment period of 25 years.
The Pros: if you payments are regular then any remaining debt after 25 years will be pardoned. Your debts can be forgiven after 10 years if you work in public service.
The Cons: if you fail to provide all the income annual documentation to your loan servicer, you will be enrolled automatically in standard repayment plan, which means huge monthly payments, not only this but you will also have to pay income tax on the amount of debt that is forgiven after 25 years.
Pay As You Earn Repayment (PAYE)
How It Works: under this plan, the monthly payment cannot be more than 10 % of your discretionary income. The readjustments in your payment will be done base on your income readjustments.
The Pros: Regular payment will have you forgiven debt after 20 years and if you work in public service, debt is forgiven after 10 years.
The Cons: this plan is only available for the students who have received loan disbursement on or after 1st October, and whose loan amount is high.
Income-Contingent Payment Plan
How It Works: under this plan your monthly payments are decided on one of the two factors, either up to 20% of your discretionary income or a fixed amount based on a 12 year repayment plan. People can only apply for this loan if they don’t qualify for IBR or PAYE plans.
The Pros: the remaining loan amount will be forgiven after regular payments for 25 years.
Income-Sensitive Repayment Plan
How It Works: your monthly payments will be decided on the basis of your annual income. The income-sensitive repayment plan is an alternative to the income-contingent plan. The borrowers who do not qualify for the latter apply for Income Sensitive repayment plan. It is best for the person with low income and who wants flexibility in their repayment terms.
The Pros: your monthly payment would be from 4 to 25% of your monthly gross income.
The Cons: the availability of this plan is only up to 5 years, after that you need to switch to another repayment plan, under which you have to repay your debts within 10 years or more. This plan needs reapplication every year and there is no assurance that you will be enrolled in this plan.
Contact Bruce mesnekoff for any further assistance
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ABOUT THE AUTHOR
Student loan management and consolidation expert Bruce Mesnekoff from United States of America. Bruce serves as CEO of The Student Loan Help Center.