Know your repayment options: Confronting student loan debt – Part 4

Take steps to understand your student loan repayment options.

This article is the fourth in a series about confronting student loan debt. The first three articles discussed identifying what type of student loans you might have, locating who is servicing your loan and understanding the terms of your loan. This article will discuss what options may be available to repay your student loan.

In the last couple of years the federal government has increased the options available to assist borrowers to successfully fulfill their obligations. Standard and graduated repayment plans have been the typical repayment options. Both repayment plans are for federal loans. On the standard repayment plan, payments are a fixed amount of at least $50 per month. You have up to 10 years to pay back the loan and will pay less interest. On a graduated repayment plan, the payments are lower at first and then increase, usually every two years. You also have 10 years to pay the loan back.

New repayment options include: Extended Repayment Plan, Income-Based Repayment Plan (IBR), Pay-as-You-Earn Repayment Plan, Income-Contingent Repayment Plan, and Income-Sensitive Repayment Plan.  All of these plans are for federally backed student loans only. 

The Extended Repayment Plan allows you to pay over 25 years and may be set up as fixed or graduated payments.  In order to qualify for this repayment plan you must have more than $30,000 in loans. 

The Income-Based Repayment Plan (IBR) is based on income and family size. Typically, IBR payments will be less than 10 percent of the borrower’s income. The payments will change as the borrower’s income changes. IBR will also forgive any remaining debt after 25 years of qualified payments. Understand that the IRS will treat forgiven loan amounts as taxable income and you will receive a 1099.

The Pay-as-You-Earn Repayment Plan allows you to have a maximum monthly payment that is 10 percent of your discretionary income. The payment will never be more than the amount you would be required to pay under the Standard Repayment Plan. Payments will adjust as income changes. If your monthly payment doesn’t cover the interested accrued, the Federal Government will pay the interest for you up to three consecutive years. After 20 years, balances on qualified loans will be forgiven.

On the Income-Contingent Repayment Plan, payments are calculated each year and are based on the borrower’s adjusted gross income, family size, and the total amount of the loan. The repayment plan also adjusts as income changes. After 25 years, balances on qualified loans will be forgiven.

The Income-Sensitive Repayment Plan allows for monthly payments to be based on the borrower’s annual income. The payments change as income changes and this program will forgive any qualified loan balance after 10 years.

For the Federal Perkins Loan the repayment plan options are different than other federal student loans. Check with the school you attended while receiving this loan for more information on Perkins Loan repayment plans.

Michigan State University Extension has additional information on student loans and other information on financial management.

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