We highly encourage graduates to figure out what types of student loan they own, not just for your own record-keeping but to give you guidance on the various repayment plans available to you. Each loan type has different repayment plan options available, and here are some of them based on your loan type.
Private Loan Repayment Plans
Private loan repayment plans are lender-specific which means that you should check with your individual lender as to the options available. They offer the least flexibility of repayment plan options where most are either a standard 10-year or 25-year repayment plan. Private lenders typically do not offer income-based repayment plans that are available through some of the Federal loan programs.
Federal Loan Repayment Plans
Federal loans offer a number of different repayment plan options and it is important for you to remember that just because your loan is a Federal loan does not necessarily mean that all of these plans are available to you. As part of the review process and creating your spreadsheet, you should include those loans that are eligible or ineligible Federal loans. Here are some of the repayment plans available under the Federal loan programs.
- Standard Repayment Plan – this plan allows you to repay your loans at a fixed amount per month (of at least $50) for 10 years on your loans unless you have a consolidation loan. These loans are available for repayment for a period of 10 to 30 years, depending on your total amount of student loan debt. All Federal loans are eligible for this repayment plan and you typically pay the least interest on this repayment type than the others.
- Graduated Repayment Plan – this plan allows you to repay your loans at a lower interest rate initially, and then after two years your payments will increase until the end of your loan term which is typically 10 years unless you have a consolidation loan at which point the repayment period could be 10 to 30 years depending on your total amount of student loan debt. This is a great option if you graduate with a job paying you a lower salary initially; however, you know you will have a higher income later. All Federal loans are eligible for this repayment option.
- Extended Repayment Plan – if you owe more than $30,000 in student loans, then you can qualify for this repayment option. This plan allows you to repay your loans at a fixed or graduated rate for 25 years.
- Income-Based Repayment Plan – this plan allows you to repay your student loans at a monthly payment of 15% of your discretionary income for 25 years. You will need to demonstrate a partial financial hardship to qualify for this type of loan and although you can remain on the plan even though your hardship no longer exists, you need to provide annual documentation of your income to set your payments for each year. As your income changes, so will your payment amounts. If you have a remaining balance that you owe on your student loans after 25 years of making regular payments, then the remaining amount is forgiven. It is important to note, though, that the forgiven amount will be considered income that will be taxable in that year. PLUS loans and consolidation loans with PLUS loans that were made to parents are not eligible for this repayment option.
- Pay As You Earn Repayment Plan – if you demonstrate that you have a partial financial hardship, and then this is another repayment plan option. This plan allows you to repay your loans monthly with a payment that is 10% of your discretionary income for up to 20 years. Any amount that you have remaining at the end of the 20-year period will be forgiven; however, you will be subject to income tax on that forgiven amount.
- Income-Contingent Repayment Plan – Allows you to repay your student loans based on your adjusted gross income, your family size and the amount you owe for up to 25 years. You do not need to show a partial financial hardship to qualify for this repayment plan. If you still have a remaining balance at the end of 25 years, then the amount owed will be forgiven; however, that amount is subject to income taxes.
- Income-Sensitive Repayment Plan – this plan allows you to repay your loans for 10 years based on your annual income. Your payments will change as your income changes; however, there is no forgiveness amount at the end of the period.
- Loan Forgiveness – If you work in the government or non-profit sectors or some related entities, you may be eligible for the Public Service Loan Forgiveness Plan. If you make 120 qualifying payments toward your student loans while working for one of these approving entities over 10 years, then at the end of the 10 years, your remaining loan balance will be forgiven and this forgiven amount will not be consider taxable as income. To qualify for the PSLF, you must be on one of the following repayment plans first, Income-Based Repayment, Pay As You Earn Repayment or Income-Contingent Repayment.
Remember that you can change your repayment plans while you are paying off your Federal loans so the plan that you are utilizing this year, may not be the best one for you next year. You should review your repayment plan options at least once a year to determine that you are in the best plan for each stage of your life. For example, you may lose your job and need to switch to an income based repayment plan, or you may have children and have less discretionary income to pay off your loans. As you have these life events, you should remember to review your repayment plans.