Federal Student Loan Consolidation – Repayment Options

There are a number of options available to repay your federal student loans. The one you choose will depend on your income and how much your income is likely to change in the future. You can change between plans every year if necessary, sometimes more often. Contact your lender if you wish to change your federal student loan consolidation repayment plan.

Let’s discuss the repayment plans available for federal student loans.

Standard Repayment Plan

If you can afford this plan, it is the best option to get your loan paid off as quickly as possible and with the lowest amount of interest. The standard plan is normally set up for 10 years or less and will offer the best interest rate of any plan. There is a minimum monthly payment of $50. If you find a good paying job right out of college, this plan is probably your best bet. Remember that a reasonable amount to pay each month for student loans is about 10-15% of gross income. If your loan payment is 20% or more of your income, you are probably under financial stress.

Extended Repayment Plan

This option extends your payments out over a longer period giving you lower monthly payments than the standard. Of course this means you will be paying more interest over the life of the loan and thus more for your college education. This plan can pay off your loan from between 12 and 30 years, depending on the size of the loan. It only applies to loans over $30,000, and it is not applicable for FFEL loans from before Oct 7, 1998.

Graduated Payment Plan

If you start out your working career with a modest income that you expect will grow in the future, this plan might give you the flexibility you need. You start out with lower payments that get increased gradually every two years. The minimum payment is $25 per month, but the minimum must cover at least the interest earned on the loan, so it could be higher. Also, the payment can be no less than 50% of the standard plan and no more than 150% of the standard plan.

Income Based Repayment Plans

There are several repayment plan options that base monthly payments on the amount of income you earn. In general these are recalculated every year, so you need to provide your income information for annual review.

These repayment plans have been devised to encourage people to go into low paying careers like public service. In fact the Income Based Repayment Plan (IBR Plan) will forgive the debt that remains after 10 consecutive years of being employed in public service. This can obviously be a huge benefit.

Other plans include the Income Contingent Repayment Plan (ICR Plan) for Direct loans and the Income-Sensitive Repayment Plan (ICS Plan) for loans serviced by FFEL lenders. There are lots of rules that govern these plans but they have been conceived to allow payments that people on low incomes or fluctuating incomes can afford. The ICR and ICS plans also allow the loan balance to be dismissed after 25 years, although the amount forgiven is counted as ordinary income in that year, so this most likely will result in higher taxes due.

Federal student loan consolidation repayment plans have been devised over the years to allow former students to have affordable monthly payments and avoid default. They are also very flexible and allow borrowers the possibility of changing plans fairly frequently. Despite this a lot of people owing student loans manage to default causing enormous problems for themselves with their credit ratings which takes them years to repair. In other words they don’t listen to advice given them by parents, councilors and others, and they just have to learn the hard way. You are advised to be aware of your options for paying off your federal student loan consolidation, to make your monthly payments on time, and to pay off your loans and get on with the rest of your life.

One last comment for those wondering: you cannot get out of a federal or private student loan by declaring bankruptcy.