A Guide to Student Loan Repayment Plans

A college degree today is what a high school diploma was in the 1950s. Having one is like having the secret password to open the golden door of opportunity. It’s no surprise that the costs of higher education have steadily risen over the past several decades and continue to do so. While parents bear some of the burden for their children’s education debt, they aren’t the only ones struggling. 77% of former college students¹ with education debt wish they had planned better for repaying their student loans.

This guide offers information to help understand the current repayment plans that are available for Federal Student Loans,² examples of what payments might look like and information about financial obligations under private educational loans.

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[bs_citem title=”Standard Repayment Plan” id=”citem_c3f7-d91b” parent=”collapse_4a14-620d”]

• Eligible Loans:
  • Direct subsidized and unsubsidized loans
  • Subsidized and unsubsidized Federal Stafford Loans
  • All PLUS Loans
  • All consolidation loans (Direct or FEEL)
• Monthly Payment:  Fixed payment
• Time Frame: Up to 10 years
• Good to Know: Generally the most economical plan when looking at overall amount paid

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[bs_citem title=”Graduated Repayment Plan” id=”citem_e183-f404″ parent=”collapse_4a14-620d”]

• Eligible Loans:
  • Direct subsidized and unsubsidized loans
  • Subsidized and unsubsidized Federal Stafford Loans
  • All PLUS loans
  • All consolidation Loans (Direct or FEEL)
• Monthly Payment: Starts lower then rises gradually every two years
• Time Frame: Up to 10 years
• Good to Know: Monthly payment must cover interest

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[bs_citem title=”Extended Repayment Plan” id=”citem_2fc2-d47e” parent=”collapse_4a14-620d”]

• Eligible Loans:
  • Direct subsidized and unsubsidized loans
  • Subsidized and unsubsidized Federal Stafford Loans
  • All PLUS Loans
  • All consolidation loans (Direct or FEEL)
• Monthly Payment: Can be fixed or graduated
• Time Frame: Up to 25 years
• Good to Know: You will generally pay more on this plan because of the longer repayment time

 

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[bs_citem title=”Income Based Repayment Plan  (IBR)” id=”citem_cf47-b4f7″ parent=”collapse_4a14-620d”]

• Eligible Loans:
  • Direct Subsidized and Unsubsidized loans
  • Subsidized and Unsubsidized Federal Stafford loans
  • All PLUS Loans made to students
  • Consolidation loans (Direct or FEEL) that do not include Direct or FEEL Plus made to parents
• Monthly Payment:  Maximum monthly payments are 15% of discretionary income and payments can change as income changes*must demonstrate a partial financial hardship
• Time Frame: Up to 25 years
• Good to Know: Payments can be as low as $0 depending on eligibility

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[bs_citem title=”Pay As You Earn Plan (PAYE)” id=”citem_8528-58f9″ parent=”collapse_4a14-620d”]

• Eligible Loans:
  • Direct Subsidized and Unsubsidized loans
  • Direct PLUS loans made to students
  • Direct Consolidation loans that do not include (Direct or FEEL) PLUS loans made to parents
• Monthly Payment:  Fixed payment
• Time Frame: Up to 20 years
• Good to Know: Generally the most economical plan when looking at overall amount paid

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[bs_citem title=”Income Contingent Repayment Plan (ICR)” id=”citem_75a0-633a” parent=”collapse_4a14-620d”]

• Eligible Loans:
  • Direct Subsidized and Unsubsidized loans
  • Direct PLUS Loans made to students
  • Direct consolidation loans
• Monthly Payment: Payments calculated annually based on Adjusted Gross Income, family size, and amount of Direct loan and can change  as income changes
• Time Frame: Up to 25 years
• Good to Know:Capitalization will not exceed 10% of the original amount you owed when entering repayment

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[bs_citem title=”Income Sensitive Repayment Plan” id=”citem_9f48-3c3c” parent=”collapse_4a14-620d”]

• Eligible Loans:
  • Subsidized and Unsubsidized Federal Stafford loans
  • FEEL PLUS loans
  • FEEL Consolidation loans
• Monthly Payment: Payment based on annual income and can change as income changes
• Time Frame: Up to 10 years
• Good to Know: If you will need lower payments for more than 5 years, consider Extended or Graduated Repayment

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Examples

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[bs_tab class=”active” type=”tab” href=”#bs_first_tab70″ title=”Example 1″]
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• Paul
• Age 22
• $26,946 in student debt at 3.9% interest from a four year public school
• He is employed with a starting salary $ 43,000

(Monthly payments are estimates only and are based on several assumptions that may not apply to you. To discuss actual monthly payments, contact your loan servicer.)

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Paul has several options to consider and should look at his budget before deciding which plan makes sense for him. He is starting at a good place though with his student debt a little more than half of a year’s salary pre-tax. Housing costs, depending on where he decides to live, the cost of commuting, food, utilities, work clothing; retirement savings and other insurance costs may eat up a larger portion of his budget than he anticipates. Take note that the interest paid on student loans is tax deductible under certain situations. While this reduces the overall federal tax burden on someone with probably little else to deduct, Paul will still need commitment and a comprehensive budget to pay off his student debt. Working with a financial professional may help Paul identify which repayment plan will work best for him, explain the finer details of budget management, establish strong retirement savings habits and create an overall healthy financial road map for his future.[/bs_tcontent]
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• Camille
• Age 23
• $85,983 in student debt at 3.9% interest from a four year private school
• She is employed with a starting salary of $60,000

(Monthly payments are estimates only and are based on several assumptions that may not apply to you. To discuss actual monthly payments, contact your loan servicer.)

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While $60,000 seems like a windfall right out of college, Camille’s student debt is greater than an entire year’s salary pre-tax. She will need to budget carefully and get help from a financial professional to work through which repayment plan will benefit her best while allowing her to achieve other goals like retirement savings. Camille will want to pay particular attention when factoring in living costs like housing, insurance, transportation, utilities, etc. She will want to make sure she has a healthy financial roadmap for her future while still committing to paying down her student debt. [/bs_tcontent]
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Summary

Students and parents should consult with a financial professional and/or their loan servicer to determine which repayment plan works best for them. They can help you avoid the costly mistakes that often happen when you learn-as-you-go. Rules and repayment plans can change frequently so take advantage of the many calculators available including the calculator on the Federal Student Aid website. Keep in mind the difference between Federal Student Loans and private education loans. Private education loans, which are offered through private lenders, act more like personal loans.

Also, don’t forget about the options for forgiveness, cancellation or discharge of the debt for Federal student loans. They have specific criteria that must be met to qualify for each category and doing a little research may save you thousands of dollars. Private education loans aren’t required by law to offer forgiveness, cancellation or discharge options. Co-signers (parents, spouses, grandparents, etc.) often have their credit damaged when they can’t pay back these loans if the student defaults or in some cases; tragically dies too soon. Proposed legislation, the Christopher Brynski Loan Protection Act, would require private lenders to clearly explain the responsibilities of co-signers in the event of death or disability. Make sure you are aware of the terms and conditions of the loans in your name and have adequate insurance to cover those obligations if the unthinkable happens.

Student loan payments may be the cause of anxiety, but establishing a solid budget and a good understanding of the loan repayment plans can help relieve much of that. Another anxiety buster is open communication between students/graduates and parents. Going over expectations; who will pay for what and for how long, and having  frequent check-ins to make sure the plan is still working for all involved not only keeps everyone “honest” but also keeps the lines of communication open.

TC88409(0116)3

 

1. Informed Index:  The Student Loan Landscape.  October 7, 2015.  Citizens Bank.
2. Federal Student Aid; Office of the U.S. Department of Education. https://studentaid.ed.gov