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Quick Guide to Federal Student Loan Repayment Options

by Student Loan Daddy

When you borrow a federal student loan, Student PLUS loan, or Parent PLUS loan through the Federal Direct Loan Program you may be eligible for one or more options when it comes time to start repaying your loan. Here’s a quick rundown of the different repayment options.

Standard Repayment

With standard repayment, you pay a set amount each month until your Direct Loans are paid in full. You have 10 years to repay tour loans with a minimum monthly payment of $50. The standard repayment plan is designed to get you to repay your loans in the shortest amount of time with the least amount of cost due to interest payments.

The government recommends standard repayment if you can afford to make more than the minimum monthly payment, as you’ll be able to pay off the loans early and save on interest payments.

Eligible loans: Student loans, Student PLUS loans, Parent PLUS loans

Extended Repayment

Extended repayment gives you 25 years to pay back your federal student loans and offers two repayment options: fixed or graduated. Fixed payments, like with standard repayment, are the same every month. Graduated payments, like with graduated repayment below, start low and increase every two years. To be eligible for extended repayment, you must have more than $30,000 in federal student loan debt and no outstanding balance on a federal student loan as of October 7, 1998.

Extended repayment is recommended if you need to make smaller monthly payments. However, it’s important to remember that while the loan payment itself may be easier to make under extended repayment, you’ll probably end up paying significantly more in interest if you take 15 years longer to repay your loans.

Eligible loans: Student loans, Student PLUS loans, Parent PLUS loans

Graduated Repayment

Graduated repayment allows you to start out low when you beginning to pay back your student loans, with minimum loan payments (which will never be less than the amount of interest that accrues between payments) increasing every two years, presumably as you begin to earn more money. As with standard repayment, you’ll have up to 10 years to repay your loans, so you can expect some pretty expensive monthly loan payments towards the end of your 10-year term. However, no single payment under the graduated repayment plan will be more than three times greater than any other payment. In other words, if your first payment is $300, your last payment won’t be more than $900.

Eligible loans: Student loans, Student PLUS loans, Parent PLUS loans

Income Contingent Repayment

The idea behind income contingent repayment (ICR) is to allow you to meet your student loan obligations “without causing undue financial hardship.” Under ICR your minimum monthly payments will be calculated each year based on your adjusted gross income (plus your spouse’s adjusted gross income, if you’re married), the size of your family, and the total remaining balance on your federal college loans. You have 25 years to repay your loans (not including time spent in deferment or forbearance), after which any remaining unpaid portion is discharged, which means you won’t have to repay it.

The plan determines minimum monthly payment by the lesser of two calculations:

Either the amount that you would pay if you repaid your loan over 12 years multiplied by a percentage that varies with your annual income, or 20 percent of your monthly discretionary income, which is figured by taking your adjusted gross income, subtracting the poverty level for your state of residence and family size, and dividing the result by 12

If your monthly payments aren’t big enough to cover the interest that’s accumulated on your loans, any unpaid interest will be capitalized once each year, which means it will be added to the balance that you owe (but capitalization won’t exceed 10 percent of the original amount you owed when you entered repayment).

Eligible loans: Student loans, Student PLUS loans

Income-Based Repayment

Under income-based repayment (IBR), the amount you owe each month will be based on a percentage of your income and adjusted annually. Currently, the plan allows low-income students — based on income and family size — to cap monthly student loan payments at 15 percent of their discretionary income for a maximum of 25 years. After 25 years, any remaining loan balance is forgiven. If you are currently enrolled in college — and borrowed your first student loan in or after 2008 and will take out another loan in 2012 — you can qualify for better IBR terms if you apply to the program before June 30, 2012, including a reduction of the loan payment cap from 15 percent of discretionary income to 10 percent and a reduction of the repayment term from 25 years to 20 years.

Eligible loans: Student loans, Student PLUS loans

For More Information

If you would like more information about federal student loan repayment options, you may contact your school’s financial aid office or call the Federal Student Aid Information Center toll-free at (800) 433-3243.

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