The 7 Types of Federal Student Loan Payment Plans
Borrowers should contact their lender, ask questions, and be fully prepared to discuss their financial situation in order to make the best out of their conversations. Borrowers should also take advantage of the new system and pick the one that is most suitable for their needs.
1. Standard Repayment Plan
Most borrowers are automatically enrolled in this plan, unless they choose another one. It requires the borrower to make fixed monthly payments at a minimum of $50 for up to 10 years. The fixed monthly payments adjust accordingly to your current salary, and you could pay higher amount per month, but you will pay off your loans faster and you will pay less interest as a result. This option is best suited for someone in a stable job, who has a steady income, and can afford to make high monthly payments. It is also the most popular option. About 2/3 of all direct-loan borrowers (around 10 million people) opt to stay on this payment plan.
2. Graduated Repayment Plan
This plan is suitable for borrowers who cannot handle higher monthly payments under the Standard Repayment Plan. Monthly payments under this plan start at a low rate, but it will increase every 2 years. The downside is that borrowers will end up paying more interest over the lifetime of the loan. If borrowers are confident that their income will increase steadily over the next few years, this may be their best plan. This gives them enough breathing room at the beginning to start making payments. About 1.2 million borrowers are currently enrolled in this plan.
3. Extended Repayment Plan
This plan has a repayment period of up to 25 years. Borrowers have the flexibility of choosing to either set up fixed monthly payments of have monthly payments increase over time. To be eligible for this plan, the borrower must have more than $30,000 in Direct Loans of Federal Family Education Loans borrowed after October 7, 1998. This plan is suitable for someone who wants the balance of smaller payments and more time to pay off their loans. But the additional time comes at a cost, as the borrower will end up paying more interest over the extended period of time. Around 1.6 million borrowers currently take advantage of this option.
4. Income-Based Repayment (IBR)
This plan is more complicated than the ones above, and it takes into consideration the financial hardships that borrowers may face. Each monthly payment is capped at 15% of the borrowers' discretionary income, and it is re-adjusted yearly based on income and family size. The repayment period can be as long as 25 years. To become eligible, the borrower must demonstrate "partial financial hardship" so payments calculated would generally be low.
This plan is suitable for people who work in the public service sector, because their debts could be forgiven after 10 years. Even if the borrowers are not employees of the public sector, if they make regular payments, they could become eligible to have their debt forgiven after 25 years. Additionally, the government may also pay for any unpaid accrued interest on certain loans for up to three consecutive years if borrowers' payments don't cover it.
Unfortunately, under this plan, borrowers have to be vigilant and diligent in providing comprehensive and thorough documentation of their financial situation to the loan servicer. If they are late in supplying that information, they will automatically be enrolled in the Standard Repayment Plan, which can mean a huge jump in payments. Additionally, if they have a longer repayment period, they will end up paying more interest over the life of this loan and they may also have to pay income taxes on the amount of debt that is forgiven after 25 years. About 1 million borrowers are enrolled in this plan.
5. Pay As You Earn Repayment (PAYE)
Under this plan, monthly payments are capped at 10% of borrowers' discretionary income, and that amount is adjusted on a yearly basis by looking at the income and family size of the borrowers. Additionally, the borrower must demonstrate "partial financial hardship" to be eligible. It is more suitable for recent graduates who want to keep their monthly payments low and affordable. It may be particularly advantageous for graduate students in high-cost programs, like law and business school.
Borrowers under this plan could have their remaining debt forgiven after 20 years. If they work in public service, they could have their debt forgiven after 10 years. Under certain conditions, the government will pay for their unpaid accrued interest for up to three consecutive years from the date that they started repaying your loans under PAYE. Additionally, interest is not added to their principle, therefore their overall amount would not be increased. However, if borrowers do not have partial financial hardship, their interest may still be added to the overall payment, but would only be limited to 10% of the original principle.
This payment plan is only available to borrowers who have received a loan disbursement from their schools on or after October 1, 2011, and who were new borrowers as of October 1, 2007. Additionally, borrowers must also provide documentation of their income to your loan servicer each year or they will automatically be enrolled in the Standard Repayment Plan. Furthermore, they may still have to pay for income taxes on the amount of debt that is forgiven.
6. Income-Contingent Payment Plan (ICR)
Under this plan, payments which can be made for up to 25 years are based on the adjusted gross income of the borrower, their family size, and the amount of their loans. The payment adjusts as their income changes. The amount to be paid is the lesser of 1) amount calculated on 12-year repayment plan that's multiplied by an income percentage factor or 2) 20% of your monthly discretionary income. It may be best suited for borrowers who don't qualify for IBR or PAYE plans (above) because they cannot demonstrate a partial financial hardship, but who still desire to keep monthly payments low.
Borrowers could potentially have the remainder of their loan forgiven after 25 years of regular payments, but they could end up paying for more over the lifetime of the loan. Additionally, they may have to pay income taxes on any forgiven debt. If monthly payment under the plan doesn't cover accrued interest, the interest on the loan is added to the principal once a year until the total balance is 10% higher than the original balance.
7. Income-Sensitive Repayment Plan (ISR)
Under this plan, monthly payments are based on the annual income of the borrower. This plan is tailored to the income of the borrower and it is suitable for borrowers with loans that do not qualify for the plan above. Borrowers are given the freedom of choosing the percentage of their monthly payment which will be paid towards student loans. It can vary from 4% to 25% of their monthly paycheck. Borrowers must keep in mind that their payments must be greater than or equal to the interest that accrues.
It is best for low-income borrowers who want flexibility in setting their own repayment terms, and who are mature and responsible enough to keep up with the details of the plan.
Also, borrowers should know that this plan is only available for up to 5 years. After that time is up, they must decide which repayment plan to switch into. They must also re-apply for this plan annually to continue enrollment in this plan, with the understanding that they may not gain admission.
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