Loan Repayment Options
It is helpful to use one of the many repayment calculators that are available to determine the best repayment option for you. Calculators are found on your lender's website or on www.finaid.org. Another excellent website for reference is www.ecmc.org. This site is designed to help students with information on repaying their student loans.
Remember, all federal loans allow prepayment without penalty and you can change the repayment option once per year.
Brief summary of repayment options currently available
Under this plan you will pay a fixed monthly amount for a loan term of up to 10 years. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.
This plan is like standard repayment, but allows a loan term of 12 to 30 years, depending on the total amount borrowed. Stretching out the payments over a longer term reduces the size of each payment, but increases the total amount repaid over the lifetime of the loan.
Unlike the standard and extended repayment plans, this plan starts off with lower payments, which gradually increase every two years. The loan term is 12 to 30 years, depending on the total amount borrowed. The monthly payment can be no less than 50% and no more than 150% of the monthly payment under the standard repayment plan. The monthly payment must be at least the interest that accrues, and must also be at least $25.
As an alternative to income contingent repayment, FFELP lenders offer borrowers income-sensitive repayment, which pegs the monthly payments to a percentage of gross monthly income. The loan term is 10 years.
Income-Based Repayment (IBR)
This option became available on July 1, 2009. It is best for borrowers who are experiencing financial difficulty, have low income compared with their debt, or who are pursuing a career in public service. It is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries. It does this by capping the monthly payments at a percentage of the borrower's discretionary income, which is based on the borrower's income and family size, not the total amount borrowed. The monthly payment amount is adjusted annually, based on changes in annual income and family size. Most borrowers will have a monthly payment under income-based repayment that is less than 10% of gross income. This includes single borrowers with less than $50,000 in income and married borrowers with two children who have less than $100,000 in income.
An important feature of the government's IBR program is that although you must initially sign up for 25-year income-contingent repayment, you are not locked into this payment plan. If your circumstances change or if you just decide that you want to pay off your loan more rapidly, you may do so.
Consolidation loans combine several student loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans, similar to refinancing a mortgage. Consolidation loans are available for most federal loans, including FFELP (Stafford, Graduate PLUS and Perkins) through the US Department of Education's Federal Direct Loan Consolidation program (www.loanconsolidation.ed.gov). The interest rate on a consolidation loan is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 of a percent and capped at 8.25%.
There are several tax benefits for educational expenses, including the Hope Scholarship and Lifetime Learning tax credits, the Tuition and Fees Deduction, the Student Loan Interest Deduction, and employer education assistance. For more information on these benefits go to www.finaid.org/otheraid/tax.