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What are the Most Common Student Loan Repayment Options?
Millions of college students have had to face that moment when the excitement of graduation fades and the first student loan repayment bill arrives. To avoid any shocks when that moment arrives for you, it’s a good idea to get to know what student loan repayment options exist, and which ones you should plan to pursue.
Private Student Loans and Standard Repayment Plans
It’s important to note that your payment options will likely be more limited with private borrowers than with federal loans. In a standard repayment plan, your monthly payment amount is solely determined by the amount you borrowed divided by the number of months in the repayment period. While private lenders are usually willing to negotiate, many don’t have pre-arranged alternative payment plans.
Always be sure to ask detailed questions about the payment options when you’re arranging a private loan, and be sure to take advantage of resources like Sallie Mae’s payment estimate calculator when considering your choices.
In cases where private lenders do offer different options for student loan repayment plans, they’ll usually be similar to the federal government’s Direct Loan plans, which are discussed in more detail below.
Extended Repayment Plans
An extended federal student loan repayment plan simply extends the repayment period. In the case of federal Direct Loans, the standard repayment plan is for 10 years, while the extended plan is for 25 years. This has the advantage of reducing your monthly payment amount, but increases the length of time you’ll be paying for the loan, and will increase the interest charges you incur over its lifetime.
Graduated Repayment Plans
This type of plan is intended to match the earning potential of an average college graduate. It starts out with smaller monthly payment amounts that gradually increase every two to five years. This makes it easier to afford your student loan payments early in your career, but increases the overall cost and lifetime of the loan.
Student Loan Repayment Plans Based on Income
Federal student loan programs have a variety of payment plans tied to your yearly income. Each option calculates your monthly payment amounts using a formula for a specific percentage of your income, usually around 10 to 20 percent. In some cases the payment will be based on your gross income (before you pay taxes), while in others it will be based on your discretionary income, which is calculated by subtracting an amount equal to 150 percent of the poverty level in your state from your gross income.
These plans will help you stay current on your federal student loan payments even if you’re experiencing difficulties with income, but will extend the length of your loan and increase its overall cost. Some federal options include provisions that forgive the entire loan debt if you haven’t been able to pay it off within 20 to 25 years even under an income-based plan. However, it’s important to note that the amount of your loan that was forgiven may be counted as income, which can drastically increase your tax bill.
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