Federal Student Loan Repayment Options

Congratulations!   You made it through four (or more) grueling years of college to receive that coveted degree.  Sit back, relax and wait for that first student loan bill, right?  If you do nothing, you’ll automatically be set up on the “standard” repayment plan.  Depending on the size of each loan, this typically translates to a 10-year payment term.  This might be appropriate for some people.  However, since more than one-third of borrowers under the age of 30 are more than 90 days delinquent, I’m guessing that it’s unaffordable for many recent graduates.

Loan Consolidation - If you consolidate your loans, and the balance exceeds $30,000, you will have the option of setting up an “extended” repayment plan to stretch the payments out to a term of up to 25 years.  This can allow you to make much lower payments.  Then again, you would also pay a ton more in interest charges over time. 

For example, let’s say that Oliver owes $45,000 with an interest rate of 5.25%.  The 10-year plan would require a monthly payment of $483, with total interest being just under $13,000.  The 25-year plan would lower the monthly payment to $270, but would nearly double the total interest paid at about $36,000.  In the long term, the 10-year plan would seem to be a better option.  But if the higher payment is unaffordable, then falling behind on payments could be a bigger problem.

Graduated Payment - Another option is the “graduated” payment plan.  Think of this plan as a staircase.  Payments start low and increase every two years. A graduated payment can be set up for both shorter term and longer term plans.  For example, I recently helped one of my clients (her loan totaled $120,000) set up a graduated plan with the payments starting at $600 per month.  By the end of the 25-year term, her payments will eventually be $1,300 per month.  Why does this plan make sense for my client?  Well, she’s on a debt management plan and is scheduled to have her credit card debt paid off within a few years.  So, she’ll have the room in her budget to absorb the higher payments on the graduated plan.  For most people, this would seem to be a risky proposition.

Income-Based Repayment (IBR) - This program allows borrowers to have a payment based on their income, household size and debt amount.  You can find out if you might be eligible by trying out the Department of Education’s IBR calculator.  If you stick with an IBR plan for 25 years, you’re eligible to have your loan forgiven.  Better yet, if you work for a nonprofit or government agency, you might be eligible to have the loan forgiven after 10 years as part of the Public Service Loan Forgiveness program.

Pay As You Earn (PAYE) - The PAYE program is essentially the same idea as IBR, but is designed for newer borrowers and offers better terms.  Payments under PAYE are lower than IBR, and it only takes 20 years to forgive loans under the PAYE plan.   See if this is an option for you by checking out the PAYE calculator.  Payments under PAYE are also eligible for Public Service Loan Forgiveness.

If you’re unable to make any payments, you may still want to see if you’re eligible for IBR or PAYE.  In some cases, your required payment is actually zero.  As an alternative, you may have the option of skipping payments for a period of time by setting up a deferment or forbearance. 

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