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Loan repayment 101

Find out which option is best for you

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By: Erica Shafer
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Scholarships

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 Options

Standard

For: Those financially prepared to pay loans right after school
Repayment Terms: Minimum monthly payment $50, up to 10 years to repay.
Application needed?: No
Benefits: Can result in paying the least total interest back to the federal government.
Warning: Creates higher monthly payments as compared to most other repayment options.

Graduated

For: Those expecting greater financial success in the future.
Repayment Terms: 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.
Application needed?: Yes
Benefits: Helpful for those whose income will increase over time and cannot afford the Standard payment directly out of school.
Warning: 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

For: Those with more than $30,000 in Direct loan debt and want their repayment extended past 10 years.
Repayment Terms: Fixed monthly payment divided over the loan term you qualify for (up to 25 years)
Application needed?: Yes
Benefits: Should lower monthly loan payment to an affordable amount.
Warning: Will always make a loan more expensive due to interest accruing for a longer period of time.

Income Contingent

For: Repayment based off of income level.
Repayment Terms: 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. **
Application needed?: Yes
Benefits: If loan is not fully repaid after 25 years (deferment or forbearance periods to not count), the unpaid portion will be discharged.
Warning: 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.
Repayment Terms: 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. **
Application needed?: Yes
Benefits: If loan is not fully repaid after 25 years (deferment or forbearance periods to not count), the unpaid portion will be discharged. 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.
Warning: 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.

To see your current federal student loan balance go here. For more information on federal Direct repayment plans, loan consolidation, and repayment calculators go here.

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.


Erica Shafer is the Associate Director of Financial Aid at Colorado College. She has worked in the field of financial aid for six years and enjoys it immensely. As once an undergraduate student who utilized financial aid herself and now both a graduate International MBA candidate and a financial aid adviser, Erica has been able to gain a vantage point of the financial aid arena which spans the outlooks of all parties involved in the financial aid process.
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