Federal Student Loan Consolidation- Repayment Options
There are a number of options available to repay your federal student loans. Your income and expected income in the future will determine which plan you will ultimately choose. Repayment plans can be changed each year or even more often in certain circumstances. It will be necessary to get in touch with your lender if you need to change your student loan consolidation repayment plan.
Let’s discuss the repayment plans available for federal student loans.
The Standard Repayment Plan
If this plan is affordable it is the best option to get the loan paid off as quickly as possible and with the least amount of interest. The standard repayment plan will have the best possible interest rate and is usually set up for repayment in 10 years or less. There is a minimum monthly payment of $50. For those finding a good paying job right out of college, this is the best option. Borrowers should know that they should not exceed payments of 10-15% of their monthly income. You are most likely in financial difficulty if your monthly payments are 20% of gross income or higher.
Extended Repayment Plan
This option extends your payments out over a longer period giving you lower monthly payments than the standard. This translates into paying more for your education because you will be paying more interest on the loan. Depending on the amount of the loan, with this plan the balance is normally paid off in anywhere from 12-30 years. It only applies to loans over $30,000, and it is not applicable for FFEL loans from before Oct 7, 1998.
Graduated Payment Plan
If you start out your working career with a modest income that you expect will grow in the future, this plan might give you the flexibility you need. Payments are increased every two years after starting the loan repayment with low monthly amounts. The minimum payment is $25 per month, but the minimum must cover at least the interest earned on the loan, so it could be higher. There are also other restrictions. The payment cannot be less than half of the standard plan and not be greater than 150% of the standard plan.
Income Based Repayment Plans
Several options exist to set up monthly payments based on the amount of income you earn. You need to keep accurate records of income and tax information because these plans are recalculated each year.
These repayment plans have been devised to encourage people to go into low paying careers like public service. In fact the Income Based Repayment Plan (IBR Plan) will forgive the debt that remains after 10 consecutive years of being employed in public service. This can obviously be a huge benefit.
There are other income based plans including the Income Sensitive Repayment Plan (ICS Plan) for FFEL loans and the Income Contingent Repayment Plan (ICR Plan) for Direct loans. The basic idea behind these plans is to offer repayment options that borrowers can afford. The ICS and ICR plans have provisions such that the loan balance can be written off in 25 years, but that amount is counted as taxable income in the year the loan was dismissed.
Federal student loan consolidation repayment plans have been devised over the years to allow former students to have affordable monthly payments and avoid default. The plans are very flexible and allow for the borrower to change repayment plan fairly often if necessary. Unfortunately many people have defaulted on their student loans, and this causes huge problems and penalties that can take many years to fix. In other words they don’t listen to advice given them by parents, councilors and others, and they just have to learn the hard way. Borrowers need to know their options with respect to a federal student loan consolidation, to keep their payments current and to make every attempt to get out from under their student loans and get on with the rest of their lives..
One last comment for those wondering: you cannot get out of a federal or private student loan by declaring bankruptcy. Learn more at Student Loan Consolidation.
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