By: AnnaMarie Mock, CFP®
The first article in the series, “Understanding Your Federal Student Loans: Part 1,” provided an introduction to student loans and how to organize the pertinent data to evaluate your loan options. This article outlines the different incentives that are provided with Federal Loans.
Repayment Plan Options
To make your payments more affordable, repayment plans can be based on length of time or driven by income. Although you may select or be assigned a repayment plan when you first begin repaying your student loans, you can change repayment plans at any time. There are eight different repayment plans offered.
Below are four of the key repayment plans. For more information on all of the repayment plans, you can go to studentaid.ed.gov or talk to your loan servicer.
1) Standard: This is the basic repayment plan. Payments are fixed and made for up to 10 years. The monthly payments may be slightly higher than other payment options, but the loan will be paid off in the shortest amount of time.
2) Pay As You Earn (PAYE): This is an income driven repayment plan where the payments are limited to 10 percent of discretionary income and limited to new borrowers after Oct 1, 2007. At the end of a 20-year repayment term, any outstanding loan balance is forgiven as long as no payments were missed during the term. Depending on the date your student loans were disbursed, it may cap loan payments at a smaller percent of income, meaning that payments could be lower.
3) Revised Pay As You Earn (REPAYE): This income driven repayment plan limits your payments to 10 percent of your discretionary income. Any Direct Loan borrower is eligible to select this plan. This is the revised version of PAYE which opens eligibility to more borrowers. Loan balances are forgiven after 20 years of eligible payments for undergraduate degrees and 25 years for graduate and professional degrees. If the monthly payment does not cover the interest charged, the Department of Education (DOE) will pay any excess interest for up to three years and then 50% of the unpaid interest.
4) Income Based (IBR): For this repayment plan, the monthly payment will be 10-15% of discretionary income if you're a new borrower but never more than the 10-year Standard Repayment Plan amount.
Payment options 2 through 4 are recalculated every year based on updated income and family size. If you file a joint tax return with your spouse, your household income will be used to calculate the monthly payment amount.
Only under the income-driven repayment plans may the remaining balance of your loan be forgiven if it is not repaid in full after 240 months (20 years) for undergraduate debt or 300 months (25 years) for graduate debt. If you are not in any of the income repayment plans currently, the clock will start when you enroll in the new plan. The chart below indicates what type of repayment plan different loans can be placed in.
For more information, go to the Repayment Calculator to compare the different types of repayment plans based on the actual loans. This will calculate a rough estimate of what you would be paying in each of the plans and some additional information on how it is structured.
A Direct Consolidation Loan allows you to consolidate multiple federal loans into one loan which results in a single monthly payment. Loan consolidation can, also, provide access to the loan forgiveness programs that were not available in your current repayment plan.
Because consolidation usually increases the period of time you to have to repay your loans, you may pay more in payments and interest. Once your loans are combined into a Direct Consolidation Loan, they cannot be removed.
It is important to remember that if any of your current loans are in any of the income repayment plans, be wary of consolidating. If you’ve already made progress toward loan forgiveness in any of the income-driven plans, consolidating will start the clock over. For example, if you’ve been in an income-based repayment plan for five years and consolidate all your loans, you will lose the five years progress you made toward forgiveness. Consolidation would be ideal for those beginning the repayment process or are not in the income driven repayment plans.
There are many factors to consider when evaluating the best course of action for loans. Knowing and understanding the dynamic of your student loans is an important step in navigating the path to ﬁnancial success.
If you have any questions about the repayment options offered, please contact a member of the HIGHLAND team.