Once school is completed, the Student Loan Repayment process begins. Even with a grace period after graduation, that first payment tends to sneak up on people. Perhaps they haven’t found employment yet or in the sudden rush of a new job, new living arrangements, new life it has just been overlooked. If their financial situation isn’t up to par yet, recent graduates (and their parents) have a range of Student Loan Repayment options available.
Standard Repayment – Borrowers are automatically placed in this category unless they ask otherwise. The loaning institution determines the monthly amount by using a standard amortization schedule on the loan. The number of months under the standard repayment is determined by your loan size. Borrowers are allowed to pay off their loan early, reducing the amount of interest they will owe.
If a borrower does need to change their payment plan from the standard category, Student Debt Relief can assist. What we find a lot here at Student Debt Relief is borrowers consolidating their loans and entering into the Standard Repayment program as its the default repayment plan. Then they are unable to manage their payments due to a financial constraint, and fall into default on their consolidated loan which then if very difficult to resolve. For this reason we advise treading carefully in choosing a repayment plan if you will be attempting a consolidating on your own.
Extended Repayment – If a borrower needs a smaller payment and a longer period of time to repay, this may be the right option. It does mean a larger amount of interest will be applied over the extended time though which can be as long as 25 years. Borrowers should not reach for this much time just because it is available. Income increases over the years by raises, promotions or moving to higher paying employment. There is no need to extend 15 years when only five will do.
Borrowers qualify if they received their oldest loan on or after 7 October 1998 and if they have over $30,000 in either the Direct Loan or Federal Family Education Loan (FFELP) Programs. The amounts cannot be combined to make the minimum requirement.
Graduated Repayment – For Borrowers who may have to start out in lower paying positions but expect a much higher income within a few years, this can be a better option. Loan institutions allow the Borrower to pay off only the interest on the loan for two to four years, but still expect the full amount to be paid off by the end of the agreed loan period by increasing the monthly payment amount later. While this does not increase the amount of interest like an extended repayment plan, it does mean the borrower will pay more for the loan by the time the last payment is made. Its extremely important to note, that being in a Graduated Student Loan Repayment does not qualify for the Public Service Loan Forgiveness. If you are looking for early forgiveness on your loans, not to be confused with Teacher Loan Forgiveness, then you should steer away from graduated. This is another way that Student Debt Relief provides value to our customers. On a daily basis we have borrowers calling us to see why their previous 4 years of paying off their student loans do not count towards their forgiveness. We have to advise them that when they consolidated their loans, they chose Student Loan Repayment option that doesn’t qualify.
Income Contingent Repayment – This option allows borrowers to have a monthly payment that will be based on their monthly income. The main details in this plan are as follows:
- Loan Size does not necessarily determine payment amount, though may be a factor.
- Can qualify for a payment of zero
- A Borrower must resubmit taxes on a yearly basis to show financial hardship
Income Based Repayment – This plan is designed for Borrowers who have a low income and is partially based on family size. The requirements tailor the new loan payment to each applicant:
- Financial hardship must be demonstrated and is determined by comparing total loan monthly payment against discretionary income. This is calculated after rent, groceries and utility payments are deducted from the Borrower’s monthly income.
- Once qualified, the monthly payment is capped at 15 percent of discretionary income and there is no minimum payment.
- Payments are calculated every year based off your most recent income verification.
- The Borrower is still responsible for accruing interest after the first three years if the payment is less than the interest amount.
- After 300 eligible payments and 25 years, any remaining balance is written off. The Borrower can repay before 25 years if the choose to.
Federal Student Loan Consolidation is probably the best choice for graduates who hold loans from multiple sources. Since 1 July of 2010, the only source to consolidate federal student loans is the Department of Education (DoE). To get started, the DoE requires at least one eligible federal student loan. Federal and private loans cannot be combined. There is no minimum balance required to begin the process. Once completed, Borrowers will see the following changes to their loan:
- This cannot be reversed.
- It will have a new interest rate which will be a weighted average of all your loans being consolidated, not to exceed 8.25%
- Length of the loan may be extended up to 30 years. There are no penalties for paying off ahead of the scheduled term.
- This new loan will automatically reset to a standard repayment plan. If there are further financial difficulties, the Borrower can ask for another Student Loan Repayment plan.
- Additional student loans can be included later if they qualify.
Every effort should be made to pay off student loans at their original terms. If graduates and their co-signers (usually parents with their own bills) find themselves in distress, there are options to avoided defaulted student loans, keep their credit rating intact and prevent further problems down the road.