A number of options exist to pay back federal student loans. Your income and expected income in the future will determine which plan you will ultimately choose. It is possible to change repayment plans every year if necessary. Contact your lender if you wish to change your federal student loan consolidation repayment plan.
Let’s discuss the repayment plans available for federal student loans.
Standard Repayment Plan
If you can afford this plan, it is the best option to get your loan paid off as quickly as possible and with the lowest amount of interest. The standard plan is normally set up for 10 years or less and will offer the best interest rate of any plan. There is a minimum monthly payment of $50. For those finding a good paying job right out of college, this is the best option. 10-15% of monthly income is a reasonable amount for monthly payments. If your loan payment is 20% or more of your income, you are probably under financial stress.
Extended Repayment Plan
This plan offers lower monthly payments but extends them over a longer period of time than the standard plan. Of course this means you will be paying more interest over the life of the loan and thus more for your college education. This plan can pay off your loan from between 12 and 30 years, depending on the size of the loan. It only applies to loans over $30,000, and it is not applicable for FFEL loans from before Oct 7, 1998.
The 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. Payments can be as low as $25 per month, but the payment must cover the interest being earned by the lender on the loan. Also, the payment can be no less than 50% of the standard plan and no more than 150% of the standard plan.
The Income Based Repayment Plans
There are several different choices for people who wish to set up payments based on the amount of money they earn. You need to keep accurate records of income and tax information because these plans are recalculated each year.
The idea behind these repayment plans was to encourage people to work in lower paying public service types of jobs. 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.
Other plans include the Income Contingent Repayment Plan (ICR Plan) for Direct loans and the Income-Sensitive Repayment Plan (ICS Plan) for loans serviced by FFEL lenders. 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. They are also very flexible and allow borrowers the possibility of changing plans fairly frequently. Unfortunately many people have defaulted on their student loans, and this causes huge problems and penalties that can take many years to fix. It is unfortunate that many young people who borrow money for college are not sophisticated about financial matters and don’t really understand what can happen to them if they take on debt they cannot handle. 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..
Always remember there is no way to get out of a student loan by declaring bankruptcy. Learn more at Student Debt Consolidation.
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