The Ins and Outs of Student Loan Repayment Programs
Did you know that more than 50% of students leave school with debt? Choosing the career you want, getting into an education institution, finding a job and handling student loans can all be very intimidating, and adult life can be scary. We at Degree Solutions want to make your life as successful yet peaceful as possible, which is why we are going to break down the different types of federal student loan repayment programs so that you can choose what better suits your needs and feel the weight lifted off your shoulders.
The total student loan debt is $1.75 trillion and constantly increasing, which means that many people carry their debt well into their middle age! This is why understanding student loan repayment programs is so important. Repayment programs can be divided into two categories, traditional repayment programs and income-driven repayment programs. Each of these have their own particular requirements, as well as pros and cons. Let’s begin with the traditional repayment programs.
Traditional Repayment Programs.
These can be further divided into a few subcategories, Standard, Graduated, and Extended.
The Standard Repayment Program is perhaps the shortest option, offering fixed payments over a 10 year period. Because payments don’t change and have a specific period of time, you will pay less interest as you would in other repayment programs. Additionally, the fixed monthly payments, though they can be somewhat higher than in other programs, offer a stability in amount that allows you to budget accordingly. Now, a very important thing to keep in mind is that if you are aiming to access loan forgiveness programs, the Standard Repayment Program is not for you, since Public Service Loan Forgiveness offers forgiveness after 120 payments, and with the Standard Program you will have paid by then.
As you can infer by the name of this program, the Graduated Repayment Plan offers monthly payments that are gradually increased every two years. This offers flexibility by starting with lower initial payments, which allows you to budget comfortably as you start in entry-level jobs. As you grow professionally and your income increases, so will your monthly payments. The period is 10 years, which also allows you to save on interest while still enjoying the flexibility of gradual increase in payments. The period can increase to 30 years if you access loan consolidation. It’s important to mention that if your income doesn’t grow as your monthly payment does, you run the risk of being burdened with unsustainable payments. When compared to the standar plan, you will pay a little more in interest, as these accrue during the years where you pay less.
The Extended Repayment Plan offers an extended payment period of up to 25 years. Besides the longer repayment period, the Extended Repayment Plan also offers the option of fixed or graduated payments that are generally lower than those of the previous plans mentioned. In order for you to be eligible for the Extended Plan, you must owe more than $30,000 in outstanding federal student loans, which inevitably leaves out some individuals. Now, just like shorter period payments have the advantage of paying less interests while the disadvantage of higher monthly payments, for the Extended Repayment Plan it is almost the other way around. The extended payment period allows for lower monthly payments, but it means that you will end up paying more interest over the 25 years (minimum) of the repayment period. Another important factor to keep in mind, especially if you are interested in student loan forgiveness, is that this plan does not allow you to access any Public Service Loan Forgiveness options.
Having explained the traditional repayment plans, here is a quick recap:
Income-Driven Repayment Plans.
Besides the already discussed traditional programs, you have the option of income-driven repayment programs, which, dare we be reiterative, base their monthly payment in your income and family size. With these programs you will be paying from 10% to 20% of your income during a payment period of 20 to 25 years. Once the payment period has been completed, any remaining debt can be forgiven. Let’s dive further into each of the IDR plan options.
Revised Pay As You Earn (REPAYE)
This plan offers a 20 year repayment period if your loans are for undergrad studies. If you have loans for graduate studies, your repayment period increases to 25 years. Whatever your period is, the plan sets your monthly payment at 10% of your discretionary income.
If your loans are substantial and your monthly income is not enough for you to pay interest payments, you can access government subsidizing. A very attractive quality of this plan is its flexibility. Basing monthly payments on income means that if income decreases, payments decrease. Additionally, the plan offers the opportunity to access loan forgiveness at the end of the repayment period. If you find that this plan is the best for you, keep in mind that you need to rectify income and family size every year in order for you to not be removed from the plan. As with most things, being organized is key. Another thing to keep in mind is that depending on your specific income and family size, you might be better off paying your loans under the Standard Plan for a lower monthly bill.
Pay As You Earn (PAYE)
Not to be confused with REPAYE, PAYE offers monthly payments of 10% of your discretionary income for a period of 20 years. Because of its monthly payment limits, regardless of your specific characteristics, you will never pay more than what you’d pay under the Standard plan. This makes it a good plan for those with high loans, as it offers longer payment periods, access to PSLF and monthly payment caps. Another benefit being that if income decreases, so do monthly payments. However, not just anyone is eligible to pay under PAYE, since this program requires borrowers to have received their first federal student loan on or after October 1st, 2007, as well as an additional loan on October 1st, 2011.
Income-Based Repayment (IBR)
To pay under the IBR means you will have monthly payments of 15% of your discretionary income. The period, however, changes depending on when you borrowed your first federal loans. For borrowers that got their loans on or after July 1st, 2014, the repayment period is 20 years. For borrowers that got their loans before July 1st, 2014, the repayment period is 25 years. Regardless of your repayment period, you will never pay more than what you’d pay under the Standard Repayment Program,which also makes this plan ideal for those with high loans that want lower monthly payments.
Income-Contingent Repayment (ICR)
On the more expensive side of repayment plans, the Income-Contingent Repayment plan sets a monthly payment of 20% of your discretionary income for a period of 25 years, or what you’d pay on a plan with fixed payments over 12 years. It’s very important to note that under the ICR, discretionary income has a slightly different meaning than it does for other repayment plans. In order to be eligible for the ICR, those interested must be Parent PLUS loan borrowers.
Income-Sensitive Repayment (ISR)
This program is specially aimed towards low income borrowers with Federal Family Education Loan (FFEL) Program loans, making it a requirement for eligibility. The repayment period is 10 years, but the monthly payment is determined by the lender for each individual based on their annual income. The second requirement for ISR is that the monthly payments are more than 20% of your income. Keep in mind that though monthly payments are determined by the lender, they are still based on income, which means that if income decreases, so will the monthly payments.
Let’s see a recap of Income-Driven Repayment Plans (IDR):
Choosing the student loan repayment plan that is right for you is an important decision that, if done correctly, will save you from many headaches. Considering your specific needs, income and overall situation before deciding on your repayment plan is a must, and information is better understood when it is served to you in an easy-to-digest manner. This is exactly what we want, for you to get the right information, quick and easy. Once you better understand how to handle your student loans, furthering your education becomes an even more exciting journey towards better opportunities.