Which Student Loan Repayment Plan is Best for You?

With the growing prevalence of student debt in the US economy, the federal government has started to realize the importance of ways and means to help the student repay their high debts. It is not always possible for the US Department of Education to allow forgiveness of discharge of loan. What then acts as a solution to such debts is a suitable repayment plan. There are various repayment plans available that the borrowers can choose from according to their individual financial situation. These plans correspond with the financial needs and conditions of the borrower and assist him/ her to pay off a loan rather than defaulting one. 

Types of Student Loan Repayment Plans

The types of studelt loan repayment plans:

Income- Based Repayment Plan : Under this plan, maximum monthly payment towards the student debt is reduced to fifteen percent of the discretionary income. Discretionary income is the difference between the borrowers’ income and one hundred fifty percent of the poverty recommendation with respect to one’s family size and residence state, with some other terms and conditions also applicable. Since the repayment is based on a borrower’s income, therefore, the repayment amount changes along with any change in the income. The borrower is supposed to make loan repayments for a time period of 25 years, after which the remaining amount of student debt in the name of the borrower is forgiven by the federal government.

Income- Contingent Repayment Plan : Under this plan, payments to be made towards debt are calculated every year using family size, gross income of the borrower and total amount of one’s direct loans as the basis. Since the repayment is based on a borrower’s income, therefore, the repayment amount changes along with any change in the income. The borrower is supposed to make loan repayments for a time period of 25 years, after which the remaining amount of student debt in the name of the borrower is forgiven by the federal government. Monthly payment amount is the least of twenty percent of the discretionary income or a repayment amount (adjusted to the income) equal to what would be paid with a repayment plan of fixed payment amount for 12 years. 

Pay As You Earn Repayment Plan: Under this plan, the maximum monthly payment towards the student debt is reduced to ten percent of the discretionary income. Since the repayment is based on a borrower’s earnings, therefore, the repayment amount changes along with any change in the income. The borrower is supposed to make loan repayments for a time period of 20 years, after which the remaining amount of student debt in the name of the borrower is forgiven by the federal government.

Income- sensitive repayment plan: Income sensitive repayment plan allows for repayment of plan in ten years with the monthly payment in this plan is dependent on the income of the borrower. It increases with an increase in income and reduces with a fall in income. However, the monthly payment is based on a formula used by the lender to calculate the same. There is no common means to calculate the monthly payment and each lender has the right to calculate the payment amount individually. 

Standard Repayment Plan: This is the one where the borrower is supposed to make a slightly higher repayment towards debt for a period of ten years to have the debt paid in the shortest time possible. If a borrower does not select a specific repayment plan, then the Loan Servicer places the borrower on a Standard repayment plan. Except for Direct consolidation loan and FFEL consolidation loans, the monthly payment made towards debt under this plan is fixed to an amount of at least $50 each month to be made for ten years. The repayment period varies for a consolidated loan from ten to thirty years depending on the amount of consolidated student debt.

Graduated Repayment Plan: This repayment plan demands a lower monthly payment in the initial years and increases the repayment amount in every two years up till ten years for all loans except in the case of direct consolidation loans and Federal family Education loan consolidation loan. The monthly payment is never less than the interest amount that accumulates between the borrowers’ payment and is never greater than three times more any other payment. 

Extended Repayment Plan: Under the extended repayment plan, monthly payments are either a fixed or a graduated amount, i.e., an amount that increases in every two years. The borrower needs to make regular monthly payments towards the debt for a total of twenty five years. Due to extension of lifetime of the debt, this repayment plan also demands a lower monthly payment from the borrower.  

Steps to choose a repayment plan

Here are some key steps to follow while chosing your repayment plan:

Check eligibility of your loan for different repayment plans: Not all types of repayment plans are available for a particular federal student loan. In some cases, a student loan might not qualify for any repayment plan. Thus, before anything else, the borrower must check for one’s eligibility for various repayment plans and then proceed to gather further information. 

Use Federal student Aide repayment estimator : The repayment estimator is a helpful tool to know the expected amount of monthly repayment that each repayment plan would require. This way, the borrower can link his/ her future prospects with the long term commitment that these repayment plans demand from the borrowers.

By following these two steps, a borrower can fairly select the best suited repayment plan. Also, a borrower has an option to switch to another student debt repayment plan in case he finds himself unable to pay for monthly loan repayment under a particular repayment plan.

General observations and guidelines for choosing a repayment plan

Some guidelines:

  • Income- based repayment plan is suitable for people with financial hardship, who are finding it difficult to meet their monthly debt payments under all other repayment plan.
  • Income- contingent repayment plan is good for those borrowers who in spite of having no financial hardship are incapable to meet their monthly payments towards debt under other plans. 
  • Like Income- based repayment plans, Pay as you earn repayment plan also suitable for borrowers with financial hardship to pay as per their income and adjusts their loan repayment amount according to the income.
  • Standard ten year loan repayment plan is suitable for borrowers who are ready to make slightly larger monthly payment towards their debt and get rid of it in the least possible time with least possible aggregate amount of repayment.
  • Graduated loan repayment plan is suitable for people with lower initial income but who anticipate an increase in their income with time.
  • Extended loan repayment plan is beneficial to people with a loan burden so high that they cannot make high proportionate monthly payments and need an extension of time to reduce their monthly payments.

Conclusion

Each repayment plan has its own set of benefits to offer for different individuals but all such plans have the soul objective of making loan repayment easy for the borrower. This not only helps the borrower maintain a healthy financial record, but also reduces the instances of loan default and benefits the economy as a whole.

The only pre- requisites to make use of such repayment plans are the right use of knowledge and hard work to implement the dedication towards repayment a student debt. The federal government is making constant efforts to make these repayment plans more accessible and affordable with each passing year with the aim of spreading the benefits of such repayment plans. Rest assured, these plans hold a great potential to get a borrower out of debt effectively and efficiently

Tags: ,