The majority of students who apply for financial aid today qualify to receive federal Direct student loans and the borrowing terms for these loans are reasonably simple (if you need a refresher here’s one.) However, repayment terms are a bit on the complicated side. That’s the bad news. The good news is, they are often the best type of financial funding for your education. So let’s talk multiple repayment options.
Each repayment plan comes with its very own specific rules and regulations. It’s important to do your research but below you will find general descriptions of each repayment program so that you can start attempting to compare your options and go after the ones that that seem most appropriate for your financial situation.
And while you’re reading, keep in mind, student loans are ultimately interest-collecting debts so the faster you can pay them back the better.
|Repayment Plan||For Who?||Repayment Terms & Time-frame||Must you apply for it?||Benefits||Warning|
|Standard||Those financially prepared to pay loans right after school.||Minimum monthly payment $50, up to 10 years to repay.||No||Can result in paying the least total interest back to the federal government.||Creates higher monthly payments as compared to most other repayment options.|
|Graduated||Those expecting greater financial success in the future.||Monthly payment amount increases approx. every 2 years until the loan is paid off. No payment can be larger than 3 times the amount of any other. Minimum monthly payment $50, up to 10 years to repay.||Yes||Helpful for those whose income will increase over time and cannot afford the Standard payment directly out of school.||Assumes the individual will be making more money in the future. Only a rational choice for those planning on entering high-paying professional fields such as accounting, medicine, law, engineering, etc.|
|Extended Fixed||Those with more than $30,000 in Direct loan debt and want their repayment extended past 10 years.||Fixed monthly payment divided over the loan term you qualify for (up to 25 years)||Yes||Should lower monthly loan payment to an affordable amount.||Will always make a loan more expensive due to interest accruing for a longer period of time.|
|Income Contingent||Repayment based off of income level.||Monthly payments are calculated on basis of your adjustment gross income (AGI), your spouse's income (if applicable), family size, and the total amount of Direct Loans. Maximum repayment period of 25 years. **||Yes||If loan is not fully repaid after 25 years (deferment or forbearance periods to not count), the unpaid portion will be discharged.||Could result in paying more interest if the repayment period is extended. Discharged amount may be taxable.***|
|Income Based||For students who are experiencing financial hardship during repayment.||Same as above.**||Yes||Same as above. If your payments are not large enough to cover the accumulated interest, the government will pay the unpaid accrued interest on Subsidized Stafford Loans (Direct Loan or FFEL) for up to 3 consecutive years from the original payment day.||Could result in paying more interest on loans if repayment period is extended.|
** Borrowers do not have to demonstrate a partial financial hardship in order to qualify.
***Under ICR your monthly payments could be higher than that of a standard repayment plan if your income is large enough. However, if your payments are smaller and not large enough to cover the interest that has accumulated on your loans, the unpaid amount will be capitalized once each year. However, capitalization will not exceed 10 percent of the original amount you owed when you entered repayment. Interest will continue to accumulate but will no longer be capitalized.
So you’ve got the loan part down, now how do you pay for the rest of your expenses? Find out more about making a work study program work for you.