Student loans have been an effective means of meeting the education expenditures in the US since 1950s when government started offering student loans under the National Defence Education Act. The Higher Education Act of 1965 further helped to broaden the scope of student loans. There are mainly two types of student loans, namely, Federal student Loans and private student loans. Federal student loans are funded by the federal government.
Interest rates on a federal loan are fixed and in some cases, tax deductible. Other than government agencies; banks and finance companies also offer student loans. Interest rates on private student loans are generally variable and higher than federal student loans. It is not really easy for an individual to repay one’s student loans. Student loan forgiveness programs are also not available to all borrowers. That is when various student debt repayment plans help an individual in paying off a student debt. 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. One such plan is Standard Repayment Plan.
Standard Repayment Plan
A standard repayment plan 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 such as Income- based repayment plan, Income- contingent repayment plan or Pay- as- you earn plan, then the company which handles the billing and other federal student loan related services, i.e., 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. Monthly payment to be made towards debt under this plan can be calculated by using the Standard Repayment Calculator.
For a student debt of, suppose, $10,000 carrying interest rate of 5%, a borrower would be making 120 monthly qualifying payment of $106 with a total ineterst payment of $2,728.72. This calculator can be used by a borrower before deciding for which repayment plan to choose from, keeping in mind their current and expected future financial situation.
A borrower also has an option to switch to another student debt repayment plan in case he finds himself unable to pay for monthly loan repayment under the standard repayment plan. There are mainly three more modes of repayment plans for student debt repayment other than 10-year standard repayment plan. These are Income Based Repayment Plan (IBRP) and Income-Contingent Repayment Plan (ICRP) and Pay as you earn repayment plan. All three repayment plans have their own benefits and costs and thus, need to be carefully analysed before making any decision.
Eligibility for Standard repayment plan
A student with Direct Unsubsidized or Subsidized Federal student loan, direct consolidation loan, Direct PLUS loan, Unsubsidized and Subsidized Federal Stafford loans, Federal Family Education Loans Program PLUS or consolidated loan is eligible for standard repayment plan of repayment. Income- contingent repayment plan does not demand any initial income eligibility specifications.
Advantages and Disadvantages of Standard Repayment Plan
The biggest advantage of this mechanism is that this minimizes the interest paid during the lifetime of the student loan. Due to this, the plan saves a lot of money to the borrower. Due to lesser number of years of debt, the interest payment made is much lower than what it could be with other repayment plans such as Income- based repayment plan, Income- contingent repayment plan or the Pay- As- You Earn Plan.
The only limitation that a borrower might face with this plan of repayment is high monthly payment to be made each month. It might not be possible for an individual to arrange for such repayment and might lead him to default on his loan. However, this limitation is overcome by the flexibility that US Department of Education allows in switching between different repayment plans. If one finds oneself caught in a difficult financial situation due to high monthly payment, he/ she can switch to a different repayment plan that demands a lower monthly payment.
With all the benefits and pitfalls that Standard loan repayment plan contains, it is important for a prudent borrower to analyse all repayment plans available and choose one accordingly. Apparently, there is a multitude of benefits that these plan offer; the borrower just needs good amount of knowledge and dedication to use them. Such reasonable loan repayment options help in lessening the number of defaults on student debt and help the economy as a whole. What is required is a good amount of self motivation to the borrowers that encourages them to repay their student loans.