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How to Choose the Right Student Loan Repayment Plan for You

Student loans can be complicated, and if you are one of the nearly 40 million Americans with student loans, as reported by NerdWallet.com, it is important to know your options for repayment.  Out of those reported borrowers who are currently repaying their student loans, nearly 30% of them are more than 30 days late on their payments, according to the Federal Reserve Bank of St. Louis.  Student loan default, defined as failure to repay a student loan according to the agreed upon terms, can carry major consequences, such as a negative credit rating and making it difficult to borrow money in the future, set up utilities, receive approval for rent, or get a cellphone plan, along with other credit approval required services.

Federal Loan Repayment Options

There are three basic repayment plans:  the standard plan, the graduated plan, the extended plan.  There are also income-driven plans, allowing you to pay between 10% and 20% of your discretionary income.  A general rule of thumb to remember is that interest on your loans will increase as you decrease your monthly payments.

  • Standard repayment- For many students, this will be the default plan you are automatically placed into if you do not choose another plan prior to repayment.  The loan balance will be divided into 120 equal payments over 10 years.  This repayment option will save you money over time, but your payments may be higher than payments made under other plans.  There is a fixed monthly minimum payment of at least $50 a month.
  • Graduated repayment– Think of this plan as walking up a set of stairs.  The payments will start lower than in in the standard plan, but will increase every 2 years, for 10 years, making the last half of your payments higher than the standard plan. Keep in mind the payment to this plan will increase even if your income does not.
  • Extended repayment– This repayment option is applicable if you have more than $30,000 of federal student loan debt.  The extended option follows the same stair step agenda as the graduated plan, but this pattern will take place over 12-30 years, instead of 10 years.  With this repayment plan you will pay more interest, as well as pay for a longer amount of time.
  • Income-based repayment– For new borrowers, those who borrowed on or after July 1, 2014, 10% of your discretionary income will be calculated to determine your monthly payment. For those who are not new borrowers, on or after July 1, 2014, 15% of your discretionary income will be used to determine your monthly payment. However, it is important to note the calculated monthly payment will never be more than the payment under the 10-year standard repayment plan. An annual application is required for this repayment plan.  If you are on this plan for 20 year (new borrowers) or 25 years, the remaining balance of your loans may be forgiven.  This will be taxed in the year it is forgiven.
  • Pay-as-you-earn repayment– This repayment option is is for borrowers who took out their first loan on or after October 1, 2007.  Monthly payments will be calculated based on 10% of your discretionary income.  Borrowers can get their remaining balance forgiven if they are on the plan for 20 years and will be taxed for the amount forgiven.
  • Income-contingent repayment– This repayment option allows you to pay the lesser of 20% of your of discretionary income, or what you would pay under a repayment plan with a fixed payment over 12 years, adjusted according to your income.  This repayment plan will also require an annual application, and only direct loans will qualify.

Although these repayment options can be confusing, there are several resources designed to help answer your questions.  Powercat Financial Counseling offers free and confidential peer-to-peer consultations on campus.  Visit our website at www.ksu.edu/pfc to schedule an appointment.  SALT, a website designed as a one-stop-shop for students, offer greats tips as well as a loan repayment calculator.  Set up a profile today at SaltMoney.org. You may also visit the federal student aid website at StudentAid.ed.gov to find out how much you owe in student loans, as well how to reach out to your loan servicer.

Emily Koochel
Graduate Research Assistant
Powercat Financial Counseling
www.ksu.edu/pfc

 

 

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