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Federal Student Loan Repayment Plans

When it comes time to repay federal student loans, the borrower has the option to choose from a variety of repayment plans. If a specific repayment plan is not chosen, the loan servicer will place the borrower on the standard repayment plan. The loan servicer or lender must provide the borrower with a loan repayment schedule that states when the first payment is due, the number and frequency of payments, and the amount of each payment. Students also need to find out if their loan has a grace period. Not all federal student loans have a grace period. The grace period is a set amount of time after the student graduates, leaves school, or drops below half-time enrollment before repayment must begin on the loan. Listed below is information about the different repayment plans available for federal student loans.

Standard Repayment

This is the default option. Fixed payments are made each month for 10 years, and at the end of the decade, the loan is paid off. The monthly payment is at least $50.

Extended Repayment

This option allows a loan term of up to 25 years depending on the total amount borrowed. Under this plan, monthly payments are fixed or graduated, and are generally lower than payments made under the standard and graduated repayment plans. Since monthly payments are lower, there will be an increase in the amount of interest paid over the life of the loan.

Graduated Repayment

This option starts off with lower payments, which gradually increase every two years. The loan term is a minimum of 10 years and can actually range from 10 to 30 years for consolidated loans. The monthly payment must at least cover the interest that accrues and should not be more than three times greater than any other payment.

Income-Contingent Repayment

Payments under these types of plan are based on the borrower's income and the total amount of debt (up to 20 percent of the discretionary income). Monthly payments are adjusted each year as the borrower's income changes. The loan term can be up to 25 years, and any remaining balance on the loan will be discharged. The canceled debt at the end of the 25 years, under current tax law, is taxable in the year it's forgiven. There are several types of these plans available. This option is available only to direct loan borrowers.

Income-Sensitive Repayment

This option is an alternative to income-driven plans for loans serviced by lenders in the Federal Family Education Loan (FFEL) Program. Monthly payments can be between 4 and 25 percent of the borrower's gross monthly income, and must be greater than or equal to the interest that accrues. Borrowers must reapply for the income-sensitive repayment plan each year, and payments increase or decrease based on annual income. Because income-sensitive repayment decreases the monthly payment and is limited to a 10-year term, it increases the size of the rest of the monthly payments, as well as the interest paid over the life of the loan, to compensate.

Income-Based Repayment

This option caps the monthly payments at a lower percentage of a narrower definition of discretionary income (usually between 10 and 15 percent). Monthly payments change as income changes. If the loan is not repaid in full after 25 years' worth of monthly payments, any outstanding balance on the loan will be forgiven, and income tax may be assessed on the forgiven amount.

Pay As You Earn Repayment Plan

The monthly payment amount under this plan will generally be 10 percent of a borrower's discretionary income but never more than the 10-year standard repayment plan amount. The repayment period is 20 years, and any remaining loan balance is forgiven if the federal student loans are not fully repaid at the end of the repayment period. Under current tax law, income tax may be due on the amount of the forgiven balance.

Deferment

A deferment is a way to temporarily postpone or lower loan payments while a student is back in school, in the military, experiencing a financial hardship, or in certain other pre-defined situations. Depending on the type of loan, the federal government may pay the interest on the loan during a deferment.

Forbearance

When a deferment is not an option, the loan servicer may grant forbearance. Forbearance may allow the borrower to stop making payments or reduce monthly payments for up to one year. Interest will continue to accrue on subsidized, unsubsidized, and all PLUS loans.

Loan Consolidation

Most federal student loans are eligible for consolidation. Consolidation is the combining of multiple loans into a single, new loan. This means one monthly payment instead of multiple payments. Loan consolidation can greatly simplify loan repayment and can lower monthly payments, but a borrower should also consider the impact of losing any benefits offered with the original loans. Private education loans are not eligible for consolidation into federal loans.

Loans in Default

To default means the borrower failed to make payments on the student loan as scheduled. The loan becomes delinquent the first day after a missed payment, and delinquency will continue until the loan payments become current. Once a loan is 90 days delinquent, the servicer reports the negative credit rating to the three major credit reporting bureaus.

Loan Discharge

A discharged loan means that the borrower is no longer expected to repay the amount of the loan. There are many reasons for loan discharge, including a school closing down, total and permanent disability, death, false certification of student eligibility, and unauthorized payment.

Loan Forgiveness

Borrowers employed in certain public service jobs who make 120 consecutive payments on their direct loans after October 1, 2007, may be able to have the remaining balance forgiven under the Public Service Loan Forgiveness Program. Teachers who have a direct loan or FFELP loan and have been teaching full-time in a low-income elementary school, secondary school, or educational service agency for five consecutive years may be able to have up to $17,500 of subsidized and unsubsidized loans forgiven. Federal Perkins loans also have a Public Service Loan Cancellation Program. For each complete year of service, a percentage of the loan may be canceled. The amount that can be canceled depends on the type of service performed. Borrowers should contact their loan servicer to find out if they qualify.

Loan Rehabilitation

Loan rehabilitation is a onetime opportunity to clear the default on a defaulted federal education loan and regain eligibility for federal student aid. If a judgment has been obtained on the defaulted loan, it is not eligible for rehabilitation. The borrower must work with the collection agency in charge of collecting the defaulted amount but can request that the payments be affordable (to the borrower) and reasonable (to the collector). Reasonable and affordable payments are determined by the guarantee agency that insures the student loan against default. After the borrower has made three consecutive, voluntary, on-time, full monthly payments on a defaulted loan, the loan may be consolidated. After the borrower has made six consecutive, voluntary, on-time, full monthly payments on a defaulted loan, the borrower regains eligibility for federal student aid. The borrower must continue to make these payments in order to retain eligibility for federal student aid. After the borrower has made 9 out of 10 consecutive, voluntary, one-time, reasonable, and affordable monthly payments on a defaulted student loan according to a loan rehabilitation agreement, the loan may be rehabilitated and the default removed from the borrower's credit history.