Student Loan Repayment Options

A variety of student loan repayment plans are available to fit yourfinancial situation.

Lenders offer a variety of plans to repay your student loans some of them quite flexible. The plans available to you depend on the types of loans you have. Find out what kind of loans you have, learn about your options, then make the best choice for your financial situation.

What Kind of Loan Do You Have?

Different rules apply to federal and private student loans. The options discussed in this article are available for federal loans. If you don't know what type of loan you have, you can find out by visiting the National Student Loan System's website ( www.nslds.ed.gov) or by calling 1-800-4-FED-AID.

Loans issued by banks or the federal government. There are two kinds of federal loans both allow you to choose from the repayment plans discussed below.

• Federal Family Education Loans (FFEL) are loans made by private lenders that are guaranteed by the federal government. That means, if you default, the lender gets reimbursed by the federal government.
• Federal Direct Loans are made directly by the federal government.

School-issued federal loans. If you have school-issued federal student loans (such as Perkins loans), ask your school about repayment options.

Private loans. Private loans, made without federal funds, come with fewer repayment options. Contact your lender, loan holder, or loan servicer to find out your repayment options.

For more details on the different types of student loans, see the Student Loan Borrower Assistance website (part of the National Consumer Law Project) at www.studentloanborrowerassistance.org.

Tips on switching plans. Keep these in mind when considering repayment plans:

• Don't wait to switch payment plans until you're seriously behind in your payments if you're in default on your loans, many of these options won't be available to you.
• You aren't locked into the method you choose you can switch payment plans each year, or in some cases, more often.

Standard Repayment Plan

This is the repayment plan offered by your lender. You make payments for up to ten years. Your monthly payments are higher than in other plans, but your total payments are lower because you pay less interest.

Graduated Repayment Plan

Under a graduated plan, payments start out low and increase during the repayment period usually every two years. This is a good option if your income is low when you graduate but will increase quickly.

Extended Repayment Plan

An extended plan allows you to stretch your repayment over a period of up to 25 years, depending on your loan amount. To be eligible for this plan, you must have an outstanding loan balance of more than $30,000.

You can combine an extended plan with graduated payments, which will lower your payments even further but will increase your overall costs even more.

Income-Based Repayment Plan

If your income is low or unstable, an "income-contingent," or "income-sensitive," repayment plan may be right for you. As your income rises or falls, so do your monthly payments. The amount of your payment is refigured every year, based on your annual income, household size, and loan amount.

Which plan is available depends on what type of loan you have.

Direct Loan Income Contingent Repayment Plan

If you have a federal Direct Loan (other than a PLUS loan), you can opt for an income contingent repayment plan. The amount you pay cannot exceed 20% of your discretionary income that is, your annual gross income less an amount based on the poverty level for your household size

If your income is very low, your payment may be $0. Or, your payment may be lower than your monthly accrued interest. As time goes on, your loan continues to grow.

If you haven't paid off your loan after 25 years, whatever balance remains will be canceled. The IRS will treat this canceled debt as income.

FFEL Income-Sensitive Repayment Plan

If you have a FFEL loan, you may qualify for an income-sensitive repayment plan. In this plan, your payments are based on your expected monthly gross income. Your payments must at least cover accruing interest (unlike income contingent plans for Direct Loans).

If you have only FFEL loans, you still may be able to get an income contingent repayment plan. See the Student Loan Borrower Assistance website at www.studentloanborrowerassistance.org for more information.

Loan Consolidation

With loan consolidation, you consolidate one, some, or all of your loans into one loan. Here are some things to keep in mind if you want to consolidate.

Interest rates. If your loans were made before July 1, 2006, loan consolidation could provide you with a lower interest rate. Most loans made after July 1, 2006 have a fixed 6.8% interest rate so loan consolidation will be unlikely to get you a better rate.

Extend repayment. You can extend repayment with loan consolidation this could lower your monthly payments.

Beware of private loan consolidation programs. Be careful when consolidating federal loans into a private loan you lose all kinds of federal rights like the options of forbearance, cancellation, deferment, and affordable repayment plans. Also, federal loan consolidation programs generally have lower interest rates than private programs.

You can only consolidate once. With a few exceptions, once you get a consolidation loan, you can't consolidate again. So be careful and make sure you get the best deal possible.

For more information on federal consolidation loans, visit the Federal Direct Consolidation Loan Information Center's website at http://loanconsolidation.ed.gov. Also, the National Consumer Law Center's Student Loan Borrower Assistance website ( www.studentloanborrowerassistance.org) has detailed information about loan consolidation.

Loan Deferment or Forbearance

If your loan payments are enormous or you've fallen on hard times, even the most flexible payment plan might not help ends meet. In many circumstances, it's possible to temporarily postpone making your loan payments or reduce the amount of your payments. These periods of relief are known as deferments (during which the government pays your interest) and forbearances (during which the amount you owe keeps going up because interest isn't being paid). To learn more on postponing payments, see Nolo's article Student Loans: Cancellation, Deferment, and Forbearance.

For a comprehensive guide to dealing with financial difficulties, read Robin Leonard's Solve Your Money Troubles: Debt, Credit & Bankruptcy (Nolo).