In the previous post we talked a little about the various aspects to paying back student loans. So what are exactly the options for you when it comes to repaying a loan? Let me try to give you what the department of education says are your options.

When one takes out a direct loan the repayment plan is to ensure that every person can repay their loan. Therefore it insures that there is a plan tailored to them. The direct loan program allows you to choose what plan best suits your needs.

Parent Direct PLUS Loan borrowers may only choose from the standard, extended, or graduated options, but student Direct PLUS Loan borrowers may also choose the income contingent repayment plan or the income-based repayment plan.

Standard Repayment

With the standard plan, you will pay the same amount each month until your loans are paid up in its entirety. Your monthly payments at minimum must be $50, and you’ll have up to 10 years to pay back the loan

The advantage of the Standard Plan Is:

• You pay more per month however this is principal. That means over the life of the loan you end up paying less interest. Think of it as a fifteen year mortgage versus a thirty year mortgage. If you could afford the higher monthly payment it is worth it over the long haul.

The disadvantage of the Standard Plan Is:

• The fact that you will be paying more per month. If that is not in your budget then you certainly should be considering this option.

Extended Repayment

To be eligible for the extended plan, you must have more than $30,000 in Direct Loan debt and you must not have an outstanding balance on a Direct Loan as of October 7, 1998. Under the extended plan you have 25 years for repayment and two payment options: fixed or graduated. Fixed payments are the same amount each month, which is similar to the standard plan. The graduated payments version starts with lower monthly payments and increase every two years, like the graduated plan below.

The advantage of the Extended Plan Is:

• You pay a smaller amount per month. This is easier for those on a tight budget.
• You also have a longer time period to pay the loan back. You have 25 years to do so.

The disadvantage of the Extended Plan Is:

• You have 25 years to pay back the loan. Therefore the interest over time is much higher than the standard plan.

 

 

 

Graduated Repayment

This plan combines the standard and extended plans. You have ten years to pay back you loan. The payment though starts low and the monthly payments increase every two years. If you feel that as you work more your income will go up then this plan is well suited for you

There are some built in rules which are beneficial. The monthly payment will not be less the interest that grows between two payments. Also there is built in protection that any one payment cannot be three times greater than any one payment. That prevents compounding payments which before you know it is extremely high.

Income Contingent Repayment

This plan gives the most wiggle room in being able to pay back your loan. What happens is that every year the monthly payment will be bases on your adjusted gross income. If you’re married your spouse will be included in that calculation. The size if your family and other factors are considered as well.

Under this plan you are paying the fewer amounts of the following two choices whichever that is:

1. the amount you would pay if you repaid your loan in 12 years multiplied by an income percentage factor that varies with your annual income, or
2. 20% of your monthly discretionary income*.

It is important to note this type of loan repayment can have the following:

If your payments are not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized.

The time period for the loan is up to 25 years. If there is still a balance on the loan it is forgiven at that time. There may be a tax gain charged to you however for the unpaid portion.

Income Based Repayment

Under this plan the required monthly payment will be based on your income during any period when you have some financial difficulties. Your monthly payment may be adjusted annually. The maximum repayment period under this plan can exceed 10 years. If you meet certain requirements over a specified period of time, you may qualify for discharge of any outstanding balance of your loans.