There are six repayment plans for your federal student loans. Read on to find out what’s best for you:
1. Standard Repayment: You are automatically enrolled into this type of repayment plan, which is the cheapest way to pay back your Federal student loans. Standard repayment means you have to make a fixed payment each month (obviously, if you can find extra money, you can always pay more than this minimum payment) for ten years.
Since ten years is a relatively short time to pay off your student loans, your monthly payments are high, but you’ll actually pay less money in interest over the life of the loan than you would with other repayment options.
Here are some numbers to back this up. Let’s say you or your parent owes $40,000 on a PLUS loan. According to the government’s standard repayment calculator, your monthly payment will be about $483. By the end of the ten years, you’ll actually have paid not $40,000, but $58,000, thanks to interest.
2. Extended Repayment: What if $483 a month is too much for you or your parent to afford? No worries! You can enroll in extended repayment, which, as its name suggests, stretches out your repayment period from ten years to a maximum of twenty-five years. You can only enroll in extended repayment if your loans are at least $30,000. The longer repayment results in lower monthly payments but more interest over the life of the loan.
Going back to our $40,000 PLUS loan example, under extended repayment the monthly payments would be $306, rather than the $483 under standard repayment. But with that lower $306 monthly payment, you end up paying a total of $92,000 over the twenty-five-year period, as compared to $58,000 with standard repayment. So while you do get a lower monthly payment, you’re paying an extra $34,000 in interest—that’s almost as much as you took out in the first place!
3. Graduated Repayment: This is a pretty innovative plan. Theoretically, as you get older and more experienced, your income should increase. So with graduated repayment, your monthly payment increases every two years—though you’ll have up to ten years to pay back the loan.
Using the $40,000 PLUS loan example, monthly payments would start at $337 for the first two years of a graduated repayment plan. In the two years after that, it jumps to $408, and during the last two years (years nine and ten) the monthly payment peaks at $725. After ten years, assuming you’ve stuck with this plan, you’ll be debt-free. Over that ten-year period, you’ll pay, in addition to the $40,000 principal, some $21,500 in interest.
4. Income-Based Repayment (IBR): This is a tad tricky. Income-based repayment caps your monthly student loan payments at a percentage of your income (maximum 15 percent). The goal of IBR is to provide a monthly payment that’s less than what it would be under standard repayment, but only if you qualify.
IBR applies to Stafford Loans, consolidation loans (more on this in a moment), and graduate PLUS loans, but not to parent PLUS loans or consolidation loans that include PLUS loans. Also, IBR is not for Perkins Loans, but it is for consolidation loans that include Perkins Loans. Is your head spinning yet?
Essentially, your monthly payment under IBR is based on your income and the size of your family. The monthly payment is calculated by taking 15 percent of the difference between your adjusted gross income and 150 percent of the Department of Health and Human Services Poverty Guideline.ç The Poverty Guideline is a threshold used to determine if someone is eligible for financial assistance from the government (this could be food stamps, welfare, or federal housing projects). Your adjusted gross income is the amount of money that you have to pay taxes on (your total income less any tax deductions).
So let’s do the math: Let’s say you’re single with a gross adjusted income of $25,000. The 2012 poverty guideline for a single person living in any state (except Alaska and Hawaii, but including the District of Columbia) is $11,170. According to the IBR formula, we have to calculate 150 percent of that number, which is 16,755. Next, we have to take 15 percent of the difference between your adjusted gross income and the poverty guideline, which is $1,236.75. Divide this number by 12, and voilà! The monthly payment under IBR would be—$103.06.
In this specific example, you would get the green light for IBR, since the IBR payment of $103 is less than the $380 owed for standard repayment. While IBR results in a lower monthly payment than the other three repayment options we talked about, you’re again stretching out the duration of the loan to twenty-five years. Don’t think you’re saving money with IBR—you’re just kicking the can down the road. However, if you still owe a balance on your loan after twenty-five years, the remaining balance will be forgiven in some cases.
If this math scared you (flashbacks to calculus class, anyone?!), there are online calculators where you can determine whether you are eligible for IBR. Best advice, though: contact your loan servicer and ask them—they will be able to tell you if you qualify rather quickly.
5. Income-Contingent Repayment (ICR): Unlike IBR, which is based on your income and family size, income-contingent repayment also factors in the amount of debt you owe. The term of the program is twenty-five years, and any balance remaining after twenty-five years has passed will be discharged, meaning you won’t be responsible for paying it. Like IBR, under ICR parent PLUS loans are excluded from the program, but all other direct loans, including PLUS loans that graduate students have, are included.
6. Income-Sensitive Repayment (ISR): This plan only applies to loans under the Federal Family Education Loan Program (FFEL). FFEL was closed down on June 30, 2010, so if you’ve taken out a loan after that date, this program will not apply to you. This wasn’t the greatest program, anyway—it’s a ten-year repayment term and your monthly payments fluctuate based on your income.
Whew! A lot to take in, right? If you’re overwhelmed, it’s totally understandable. To put it simply, the most financially wise option is always the standard repayment. You’ll get your loans paid off in a decade and be done with it. While it does have the highest monthly payment, you’ll save thousands of dollars in interest over the long run. But that might not always be possible, especially if you’re looking for a full-time job or are working in an industry where salaries are on the low side. Only you can choose which of the repayment plans will work for you. Check out the online calculators at www.studentaid.ed.gov for each type of repayment plan. There you can enter the type of federal loan you have, its interest rate, and the balance due, and the calculator will shoot off the monthly payment.
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