Terms to Know for Repayment
The grace period is the time you have after graduating and before payments on your loan are due. Federal student loans, both subsidized and unsubsidized, have a grace period of six months, while most private loans don't offer a grace period. Interest won't stop accumulating during this time unless it's a subsidized student loan. The grace period offers a chance for the borrower to find work after school as well as an opportunity to relax after they graduate. Take the time to prepare a payment plan, set up a job, and figure out life after graduation. It's an excellent opportunity to start pre-paying!
Lender vs. Loan Servicer
The institution you borrow money from is your lender. In the case of most federal student loans, the Department of Education is the lender, but they hand over the maintenance of the loan to a servicer. The loan servicer is the company that will handle your loan, maintain monthly payments, and offer support when it comes to making sure you have a comfortable payment plan. The lender provides the money, and the servicer works with you to repay the lender. The servicer is who you go to when you need to track down payments or adjust your repayment plan or when you are having trouble with payments.
For federal student loans, your servicer might be one of the following: CornerStone. PHEAA(FedLoan/AES), Granite State, Great Lakes, HESC/EdFinancial, MOHELA, Navient, Nelnet, or OSLA Servicing.
For private student loans, the lender may be a bank, credit union, or any other private company. It's important to know that in some cases, your lender can sell your loan to another lender. There are a few reasons why a lender may do this. It may simply be that they need or want to provide services for more people and need to make some room. Check out this link if your lender does sell your loan to another lender.
The repayment term is the length of time you have to pay off your loan. Federal student loan borrowers are automatically placed into a standard repayment plan that gives them 10 years to pay back the loan in its entirety. Most federal loan borrowers have options in repayment plans and can contact their servicer to find out more.
Standard Repayment Plan
The standard plan with federal loans is a 10-year repayment plan. One of the nice things about this plan is that you're not locked into it, meaning you have the ability to explore different plans and talk with your student loan servicer about different options. The standard repayment plan is set up for you to pay back your loan in 10 years. What's nice about this plan is the simplicity of it. Student loans can get extremely complicated, and the standard plan offers some ease to it all. The amount of debt + your interest rate = evenly distributed payments over 120 months (10 years). As straightforward as this plan is, there are other plans that can offer lower monthly payments and options for those borrowers who are more strapped for cash. Exploring other repayment options might be for you if the standard plan is stressing your budget.
Graduated Repayment Plan
The graduated repayment plan is a cool concept for those who are out of college and expecting a higher income over time. This plan is set up for borrowers who are in a field where income steadily increases over time, which is every college student who has recently graduated. Graduated repayment plans are offered to anyone with a federal loan and offer you 10 years to pay it off.
What makes the plan unique is the way that you pay off the loan. Monthly payments start very low but increase every two years. This gives you time to increase your income to be able to match the increasing payment amounts. This is an ideal situation for recent graduates who plan on rising through the ranks. The monthly payments will never be less than the total interest that has been accrued and won't be more than three times greater than any other payment, meaning if your first payment was $100, then the last one won't be greater than $300. For those who have consolidated loans, it's important to know that this plan treats them a little differently than unconsolidated ones. Unconsolidated loans get the standard 10-year repayment term, but consolidated loans have different lengths for the terms depending on how big your total loan is. Below shows the total amount of loans and the corresponding repayment term length.
- $7,500 or less in loans = your repayment period is 10 years
- At least $7,500 but less than $10,000 = 12 years
- At least $10,000 but less than $20,000 = 15 years
- At least $20,000 but less than $40,000 in loans = 20 years
- At least $40,000 but less than $60,000 = 25 years
- $60,000 or more = 30 years
If you don't have consolidated loans, you can still look into getting an extended graduated repayment plan, which can give you longer than 10 years to repay. The graduated repayment plan is great for anyone who wants to start with low monthly payments but plans on seeing an increase in their income. The downfall of this plan is that you'll end up paying more on your loan than you might with other plans. The plan's efficiency depends on your ability to make the increasing payment amounts. If your goal of making more money doesn't go according to plan, it may become difficult to keep up with the increasingly higher monthly payments. Remember to explore all your options before choosing a plan!
Extended Repayment Plan
The extended repayment plan is for those who are burdened with very large student loans. We should mention that you don't qualify for this plan if your federal loan is less than $30,000. If you do have a loan balance of $30,000+, extended repayment might interest you. Rather than the standard 10-year repayment term, this plan offers a 25-year term to pay back your loan. The lengthier repayment term makes the monthly payments much less.
Under this plan, you get two options for paying: fixed or graduated. The fixed plan keeps your monthly payments the same throughout your term of repayment. Extended graduated repayment offers the chance to start off with a lower monthly payment that will increase every two years. As with graduated repayment, the payments won't be more than three times greater than any other payment, so if your first payment was $100 then the last one won't be greater than $300.
As with all plans, there are some drawbacks. Extended plans leave you in debt for much longer. The payments might be less, but it will add an extra 15 years of repayment, and with added interest cost it can end up costing you double what you borrowed. A $30,000 student loan can cost you $60,000, for example. Extended plans also offer no loan forgiveness, so if that's something you want to explore, then this may not be the plan for you. Each person is unique, and so is each loan. There are many options for repayment, so explore them all to make sure you pick the one that fits like a financial glove!
Income-Driven Repayment Plans
Income-Driven Repayment Plans (IDR)
Income-driven repayment plans are a great way for federal student loan holders to decrease their monthly payments. IDRs are perfect for people with a high student loan balance and payments compared to their current income, which has to be lower to qualify. These plans are based upon your discretionary income and can get your payments to be as little as 10% of that income. It's understood that right out of school, you might not be able to get a job that pays enough for you to make your monthly payments, so four different IDRs are available as options for you. The four IDRs have shared traits that include a monthly payment determined by income and debt amount, loan forgiveness between 20-25 years of repayment, and an annual review of your financials—meaning your monthly payment may change.
IDRs benefit the borrower in many ways including lower monthly payments and the eligibility for loan forgiveness. Extending your repayment means you'll be in debt longer and interest will add up over the additional years, making you pay interest for an extra 10-15 years. You'll want to take everything into account before choosing an IDR plan, but in a lot of cases, they can help you out a lot!
Income-Based Repayment (IBR)
We like to think of income-based repayment as the base level of IDR plans. A nice benefit of IBR has to do with interest. If the interest that accumulates on your subsidized loan each month is greater than your payments under IBR, the government will pay the difference. July 1, 2014, separates the percentage of income that a borrower is liable to give towards their loan. If you took out a loan before July 1, 2014 then your payments will be no more than 15% of your discretionary income and forgiveness will be offered after 25 years of repayment. If you took out your loan after July 1, 2014, your payments will be no more than 10% of your discretionary income and forgiveness will be offered after 20 years of repayment. Sadly, borrowers of private loans and PLUS loans are not eligible for IBR.
Income-Contingent Repayment (ICR)
ICR stands out from many of the other plans because of its flexibility. ICR follows the same principle that the other income-driven repayment plans follow but has one major difference: you don't need to prove financial hardship to be eligible. This makes it easier for someone to get an ICR. This plan offers a 25-year repayment term, in which forgiveness will be offered on the remaining amount. The monthly payments will be no more than 20% of your discretionary income as well as no more than what a monthly payment would be on a fixed 12-year repayment plan, according to Federal Student Aid. One major drawback when looking into ICR is that they also consider a spouse’s income. When applying to get income-contingent repayment, they will take into account your spouse’s income in addition to yours, which means your monthly payments may increase.
Pay As You Earn (PAYE)
PAYE has many similarities to IBR but offers a few differences as well as tougher requirements to be eligible. Your monthly payments will be no more than 10% of your discretionary income and the repayment term is 20 years. Monthly payments have to be smaller than what they would be on a standard repayment plan of 10 years; if they are larger you won't qualify for PAYE. In addition to a possible lower monthly payment and getting out of debt five years quicker, PAYE offers a similar deal with interest as IBR. Like IBR, if the interest that accumulates on your subsidized loans each month is greater than your payments under PAYE, the government will pay the difference. The difference is that the interest capitalized on top of your loan balance will be limited to 10% of your remaining loan balance if you no longer qualify for PAYE. Since it's based on income, if you somehow no longer qualify for the program, any unpaid interest will not all be added on top of your loan.
The issue with PAYE is the qualifications. To be eligible, you need to be a new borrower as of Oct. 1, 2007, and any Direct Loans must have been paid in full after Oct. 1, 2011. The requirements get tougher, as the case of subsidized and unsubsidized loans from the Federal Family Education Loan or FFEL program, you won't qualify for PAYE unless you consolidate them. PAYE is a great option if you qualify, but the rigid system might make it tough to do so.
Revised Pay As You Earn (REPAYE)
Revised pay as you earn is just as it sounds: a revised version of PAYE. It was revised to open up eligibility for people who might not qualify for the PAYE program. The only people who do not qualify are borrowers with PLUS loans or private student loans.
Monthly payments are limited to 10% of your discretionary income, but unlike PAYE, you can still qualify if your monthly payments are larger than what they would be on a standard 10-year plan. Loan forgiveness is offered after 20 years of repayment on undergraduate loans and 25 years for graduate students. As you should know now, interest is an important aspect of repayment.
REPAYE offers an interesting benefit that if your minimum monthly payment on your subsidized loan does not cover the interest that accrued, the government will pay for that interest for three years. After three years, they'll pay for half of the interest charges. This means that if your REPAYE plan monthly payments are $35 but $45 including interest, the government will pay that $10 difference for the first three years. After three years, they will pay $5. REPAYE is an excellent option if you don't qualify for PAYE. Remember to consider every option you can before making a decision. Each payment plan has its own pros and cons that can benefit borrowers in different situations. These plans are here to help and so is your servicer, so give them a call!
Discretionary income is an important term to know when it comes to income-driven repayment plans. Discretionary income is simply the leftover money you have every month after all the “important” things. After you pay for rent, utilities, food, and any other essentials, the leftover money you have just for yourself is your discretionary income. Your discretionary income is an important part of looking into different repayment plans, as the movement will look to it to figure just how much can be taken off your loan payments. In some cases, monthly payments could be as low as 10% of your discretionary income. But it's important to know that purchases on your credit card doesn't count toward that income!
Applying Additional Payments
If you're on a repayment plan that is not income-driven or can be forgiven after a certain period, making additional payments is the most effective way to get out of student loan debt. Applying just a few additional dollars a month or adding to your monthly minimum payment can be an easy way to get ahead. You can see how a few extra dollars can change the total cost of your loan and see how much sooner you can repay your loans using a payoff calculator. These calculators can also be used to see total costs of income-driven plans, how much of your loans can be forgiven, and even how much financial aid you can qualify for if you're still in school.
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