How to Choose a Student Loan Repayment Plan

• By Tracy
• Also try: How to Reduce Student Loan Debt | How to Consolidate Student Loans

Introduction

• Many recent graduates are currently struggling under burdensome student loan debt. If you have recently graduated and are about to enter into repayment on your student loans, you have a limited period of time to choose a repayment plan that suits your circumstances. Alternatively, if you have been paying back your loans for a while but are having difficulty making your monthly payment, or in the luckier event your income has increased and you want to pay off your debts faster, it may be time to reconsider your repayment plan.

Step 1: Assess Your Loans

It's time to add up what you owe. (Creative Commons photo by Paul Downey)

• Your first step is determining what loans you have and where they stand.

If You Are About to Start Repaying Your Loans

1. Find out what loans you have and what you owe by using the National Student Loan Data System. You will need a PIN to access your information.
2. Unless you indicate otherwise, you will be automatically put into a standard repayment plan on your federal loans, which usually means a five to ten year term with fixed payments every month, at a minimum of $50.
3. Your lender will let you know the deadline for choosing an alternate repayment plan.
4. If you anticipate difficulty in paying that amount (calculate what a standard monthly payment would be to figure out what's due each month), consider your other repayment options, below.
5. Take into account that the repayment options below only apply to federal loans. Private lenders are not required to offer these same options, though some may do so. You will need to read the fine print of your contract to determine what the possibilities are.
6. When considering your ability to pay, also be sure to factor in any payments you'll need to make toward credit cards, private loans, and all other financial obligations.
7. Decide whether or not consolidating your loans is ultimately your best option.

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If You Want to Switch Repayment Plans

1. Be sure you fully understand the plan you are currently under and whether or not you have the option to switch.
2. Generally, you are allowed to change repayment plans once a year.
3. Again, if you have private loans, you will need to check in with your lender as private loan repayment options vary widely.

Step 2: Evaluate Repayment Options

• The terms of your repayment can be significantly varied. Be sure to research the fine print for each repayment option carefully.

1. Your options for repayment generally shift based on two factors: the life of the loan and the ratio of principal to interest in each payment.
2. Federal repayment options include:
   1. Standard payment: Standard payment is the payment schedule every borrower is automatically assigned. (FFEL borrowers have 45 days to switch from this plan after being notified by their lenders to choose a repayment plan.) Standard plans have the highest monthly payments because the terms are between five and ten years, which means you may pay less on your loan overall. Note that your monthly amount due may fluctuate if you have a variable interest rate.
   2. Extended payment: If you have total outstanding student loans that exceed $30,000, you may repay your debt on a fixed or graduated payment schedule for up to 25 years (most repayment plans are within the 10 year range). Because you're extending the term of the loan, your monthly payments will be quite a bit lower, but you will pay more in interest over the life of the loan.
   3. Graduated payment: Graduated payment is exactly what it sounds like, with payments starting out low and gradually increasing during the repayment period. Graduated plans are helpful for borrowers who are just beginning their careers and are more likely to have higher incomes over time.
   4. Income Contingent Repayment: This type of repayment plan is another one that is essentially what it sounds like. Available only to Direct loan holders, payments are calculated according to income and your total amount of debt. The loan term is up to 25 years and is regularly adjusted according to any changes in income. Payments increase as income increases, but your required payment can be no greater than 20% of any earnings above the poverty level. When the 25 year term is over, if there is a balance remaining, it will be discharged.
   5. Income Sensitive Repayment: Under an income sensitive repayment plan, borrowers with FFELP loans are allowed to make payments calculated according to gross monthly income. The loan term is 10 years long.
   6. Income Based Repayment: Income based repayment is a more generous option than the two prior income-based repayment plans, but will not go into effect until July 1, 2009. Unlike income-contingent repayment and income-sensitive repayment, it is available in both the Direct Loan and FFELP programs. The payments operate much like the above income based repayment plans, but the payments are calculated based on a lower percentage of your income.
   7. Perkins loan payment: Perkins loans function differently than other federal loans. The government establishes a consistent minimum payment per month, which is currently $30 for an NDSL loan or a Perkins Loan made before October 1, 1992 and $40 after that date.
3. See examples of the different monthly payments and total amounts paid for these repayment options at the Student Loan Borrower Assistance page on repayment options.

Evaluate each repayment option to determine how much interest you will pay over time. (Image from Student Loan Borrowers Assistance. Screenshot by Mahalo)

Calculate Potential Payments

• Now, calculate exactly what you'd pay each month and over the life of your loan using FinAid's loan calculators:
  • Standard payment calculator
  • Extended payment calculator
  • Graduated payment calculator
  • Income contingent payment calculator
  • Income sensitive payment calculator
  • Income based payment calculator

Step 3: Make a Decision

What payment plan fits into your budget? (Creative Commons photo by Steve Evans)

• Now it's time to select the repayment option that will best suit your financial situation.

1. With all your other financial obligations in mind—consult your budget—choose the repayment plan that you know you can afford.
2. It's better to pay a little more interest over time than default on your loans because you can't always afford the monthly payment. (And with late fees and penalties, you could end up paying much more.)
3. If you can afford it, choose the plan that will require you to pay the least amount of interest over the life of your loan.
4. Remember you can change your plan at least once a year if necessary, so this choice is not necessarily set in stone.

Reevaluate Occasionally

• As your circumstances shift, your repayment plan might need to do the same.

1. If your income increases, or your other financial obligations have changed, it may make sense to contact your lender and determine a new repayment plan.
2. If your income dips significantly, you may want to switch to one of the income based repayment plans. Even if you've changed your repayment plan recently, call your lender to talk about your options.
3. If you have variable rate loans, it may also make sense to consolidate your loans to lock in a fixed rate.
4. It is always better to change your repayment plan than to be unable to make a payment.
5. And if no repayment plan seems feasible, you should consider deferring your student loans or applying for a forbearance.

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Resources for How to Choose a Loan Repayment Plan

• Federal Student Aid: National Student Loan Data System
• FinAid: Student Loans
• Simple Tuition: Financial Aid and Student Loan Resource Center
• The New York Times: Times Topics: Student Loans
• FinAid: Repayment Plans
• Student Borrower Assistance: Repayment
• Student Borrower Assistance: A Resource for Borrowers, their Families and Advocates
• FinAid: Loan Calculators
• Project on Student Debt: Q&A About Income Based Repayment
• FinAid: Prepayment Calculator
• Simple Tuition: Defaulting on Student Loans

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