The time has come, to start paying back those student loans. If you’re like most freshly graduated former college students, you’ve been dreading the day you enter the repayment zone. It’s time to jump in, don’t be afraid and whatever you do, DON’T IGNORE IT! In 2012, 600,000 borrowers defaulted on their student loans. We can only imagine what that did to their credit report and overall financial future. Don’t put yourself in sticky situation. The best way to attack your student loans is to understand your options. If you weren’t aware, there are several repayment options available. There’s sure to be one that fits your income, situation and level of comfort.
Standard Repayment Plan
If you choose this plan, you’ll pay at least $50 per month (typically much higher if you’ve taken out the average student loan amount) for up to 10 years. This popular plan, chosen by 2/3 of all direct loan borrowers, has its perks! You’ll pay off your loans quicker and pay less interest than you would with other plans. However, this plan is for those who feel financially stable enough to make the higher payment typically required.
Graduated Repayment Plan
You will start out with a relatively low payment and your payment amount will increase every two years. This plan is great for those who aren’t comfortable making large payment initially but believe their income with steadily increase over time, allowing them to raise their payment gradually. The great thing about this plan is, you’ll still pay your loan off in 10 years. However, you will pay a bit more interest than if you chose the standard plan.
Extended Repayment Plan
This plan is simple. Your payment can be fixed or graduated but instead of 10 years, you’ll be allotted up to 25 years to pay off your loan. The benefit? Well, stretching the time out typically allows for a smaller payment but you’ll definitely pay more interest in that extra 15 years. It’s important to note, there are eligibility requirements to qualify for this particular plan. You must have over $30,000 in outstanding loans as a Direct Loans borrower OR a FFEL Program borrower. Example: John owes $12,000 in FFEL Program loans and $32,500 in Direct Loans. John’s Direct Loan balance qualifies for the Extended Repayment Plan but his FFEL Program loans do not.
Income Based Repayment Plan (IBR)
Struggling to make your set payments? Don’t stress. You may be eligible for the income based repayment plan. With this option, your monthly payments will be capped at 15% of your discretionary income. Each year, you will be required to submit documentation of your income (tax returns) and your payment will be reevaluated based on income and family size for up to 25 years. If you haven’t paid off your loan in full after making qualified payments for 25 years, the remaining balance will be forgiven. Note that you may have to pay income tax on that forgiven amount. Find out if you qualify for this option here!
Pay As Your Earn Repayment Plan (PAYE)
Maximum monthly payments will be 10% of your discretionary income. Like the IBR, the payment will be adjusted each year based on income and family size and you must qualify to use this plan. This plan has a repayment period of up to 20 years. As with any extended repayment period, your payments will be lower but interest paid will be higher.
Income Contingent Repayment Plan (ICR)
Payments are based on your adjusted gross income, family size and the total amount of your Direct Loans (Federal Stafford Loans and FFEL not eligible). You pay based on a 12 year repayment plan that’s multiplied by an income percentage factor or 20% of your discretionary income, whichever is less. To take advantage of this plan you don’t have to qualify for a financial hardship as you would with IBR or PAYE.
Still worried about your student loan payments? Not sure which payment plan is right for you? Need help fitting your payment into your budget? Set up a call with Dominique to get everything straightened out!