8 Repayment Plans for Student Federal Loans that You Must Understand
Going to college in the USA has become very easy with the help of federal student loans. Americans that want to get a college degree can apply, and when qualified, the government will finance their studies until they graduate. Since they are getting a loan, they have to repay it but with a low-interest rate and easy repayment plans.
Many students that qualified for the loan have to sign a contract that specifies the repayment plans. In your excitement to go to college, at last, forget to read all the details. If you are not aware yet that you can opt for several ways of paying back your debt, here are the eight repayment plans for federal student loans. At a glance, these repayment options look similar, but by studying them, you can see some differences that make one repayment approach the best for you.
- Standard Repayment Plan
All borrowers can avail of the Standard Repayment Plan. If you want to pay off your debt in the shortest time possible, this plan is ideal for you. You will be paying a fixed sum every payment schedule for ten years. However, if you are thinking about applying for public service loan forgiveness, the Standard Repayment Plan may not be the best for you.
- Graduated Repayment Plan
The Graduated Repayment Plan applies to all borrowers. You can start with small payments, and increase it gradually until you have settled your debt after ten years. A borrower that earns already and foresees regular salary increases can opt for this repayment plan. After ten years of monthly payments, you will be debt-free. For borrowers that plan to seek loan forgiveness through public service, this may not be an excellent repayment option.
- Extended Repayment Plan
This repayment approach is open to direct loan and Federal Family Education Loan (FFEL). Because of the financial assistance that the government extends will depend on the family’s financial standing, the sum is larger than the regular student loan. Parents can pay the amount borrowed in 25 years. When a family has a balance of $30,000 or more, the extended repayment plan is the right choice. You can pay small amounts until you have settled your debt.
- Pay As You Earn or PAYE
Borrowers that have received a direct loan and plans to seek public service loan forgiveness can avail of this repayment scheme. Your monthly payment will be 10% of your income for the same period and not more than what you should pay monthly under the standard repayment method. You will have small monthly dues, but because it takes many years to repay the loan, you might pay more interest.
- Revised Pay As You Earn or REPAYE
This type of repayment option is open to direct loan borrowers. Similar to PAYE, REPAYE requires 10% of monthly income for loan payment. As long as you do not mind the interest rate, you can opt for this type of loan repayment. However, this might not be ideal if you are married and file a tax return for couples.
- Income-Based Repayment (IBR)
If you have taken loans that the government has subsidized, you can use this approach to pay your debt. You must use 10%-15% of your monthly income for your monthly amortization. If you want to apply for loan forgiveness through public service, you will benefit from using this loan repayment method. For borrowers with high income, this approach to paying a loan may not be beneficial because you will be paying high interest for your overall credit.
- Income Contingent Repayment Option (ICR)
You can choose this repayment approach if you have a direct loan. The government will require you to pay 20% of your income or an amount that is equivalent to the sum that you will pay for a fixed loan of 12 years, whichever is lower.
However, if you have other debts aside from a direct loan such as a short term loan from a site like Adherents.com this may not be the best for you. The same applies to married couples that file their income tax jointly.
- Income Sensitive Repayment
Family Federal Education Loan borrowers can opt for this repayment method. Your monthly payment depends on your annual income as long as you can pay off the loan in 15 years. The monthly dues will be much lower than what you must pay under the standard repayment plan or the graduated repayment plan. However, you cannot apply for loan forgiveness under this scheme.
Remember that no repayment plan will fit everyone. Some borrowers might land a high-paying job right after graduation, while others might have low-paying jobs for years. Whatever option you take will depend on your financial situation. If you can afford to pay more, you can opt for the standard scheme. For those who are experiencing financial difficulties, there is always one option that would be beneficial to you.