Student Loan Repayment Guide

Congratulations!! You’ve graduated from college and are now on your way to bigger and better things including that big PAYCHECK you’ve worked so hard to get. You know you have student loan debt, and you are ready to pay it back once you start making an income. However, the biggest problem that Americans are now facing in these tough economic times is the ability to find a job, or find a good paying job. You may have counted on your student loans to pay for getting that college degree, but right now your college degree isn’t paying your student loans back.

Repaying Your Student Loans, Your Available Options and Things You May Not Know About

Many Americans are facing the situation where they may not have a steady job, or their income is so low that their student loans payments make up a large portion of their income. Defaulting on student loans has very serious consequences and is one option that should never be considered. If you think there is nothing you can do about your student loan payments, there are plenty of options available to you for your federal or private student loans. The biggest problem is that many people don’t know about these options until they already begin experiencing problems with repayment, which is already affecting their credit scores. In this article, you will find the solutions to some of the most common reasons for why people may have trouble paying back their student loans. You will better understand the loan repayment process, how it works, your available options and tips on how to save money and your credit score.

If you cannot repay your student loans, or you cannot repay your loans in full, then you have many options available to you depending on your situation. They include a variety of repayment plans, deferment or forbearances.

Repayment Plans

Deferments

Forbearances

In this guide, we talk about repayment plans:

Standard Repayment Plan

Most student loan repayment plans are based on the STANDARD REPAYMENT PLAN, meaning that your payment duration is ten years or 120 payments. The more you owe, the bigger your monthly loan payment will be. Paying your student loan debt using the standard repayment plan means that you will pay the least amount of interest over the life of the loan. A simple loan calculator can be used to determine your loan payment, but payments must be at least $50.

Money Saving Tip

  • Most lenders will take .25% off your current interest rate if you set up automatic monthly withdrawals from your banking institution to make your monthly loan payment. Doing this not only saves you time and the stress of having to remember your due date, but you can save money at the same time too.

Income Based Plan

The Income Based Repayment Plan is designed for borrowers that typically earn lower wages, especially if these wages are a result of some type of public service. As the title of the plan indicates, your monthly repayment under this plan depends upon your income, but it also depends upon family size as well. A mathematical calculation determines how much your monthly payment will be when you fill in the two variables. There are drawbacks and benefits to the Income Based Repayment Plan.

Benefits include:

  • Repayment based on income and family size
  • Annual repayment is typically less than 10% of your total gross salary
  • Your student loan debt payment won’t overwhelm your budget
  • Remaining loan debt qualifies for forgiveness after 25 years of payments
  • If your spouse has student loans, you both qualify for the same monthly payment, and it will be split proportionately
  • Payment is based on your income and not your student loan balance

Drawbacks include:

  • Repayment can last up to 25 years
  • Longer payoff equals more interest accruing on the loan
  • Repayment will increase as salary increases although the percentage remains the same

How to Apply for The Income Based Repayment Plan?

IBR Calculator: The first thing you need to do is calculate your monthly payment under the Income Based Repayment (IBR). If this IBR payment is less than the standard repayment, then you qualify for an income based repayment plan. A quick internet search under “IBR calculator” will get you what you need. You may also click on the following link: http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp

What would a typical payment look like under an IBR?

Using the above IBR calculator, the following criteria was entered to arrive at a monthly payment of $205. Remember that this is just an example for a family of four with an income of $50,000 and a student loan debt of $25,000.

Estimated Total Adjusted Gross Income:$50,000
Your Estimated Total Student Loans:$25,000
Your Estimated Average Interest Rate6.8%
Where You Live:Outside Of Alaska and Hawaii
Family Size:4
Total IBR Payment Due:$205
Total Due Using The Standard Repayment Plan:$287

As you can see, you can save $82 per month using the Income Based Repayment instead of the Standard Repayment.

** The amount owed on the loan and the interest rate does not factor into the IBR monthly payment. In other words, you can owe more or less with a higher or lower interest rate and your monthly payment will be the same. However, enter the information accurately in order to determine if you still qualify.

Contact Your Lender

If you think you will qualify for the Income Based Repayment Plan, the next thing you should do is contact your lender and request an IBR form. Each lender may have a slightly different form for you to fill out. You may want to continue making your regular payments or ask your lender to put you on a temporary forbearance while the paperwork is processed. 

Things To Consider With An IBR

  • Your IBR payment is based on your adjusted gross income (AGI) so you will need to submit a copy of your most current income tax return.
  • You will have to submit a new IBR with your new income tax return each year.
  • Loans that are in default don’t qualify for an IBR, so it’s important to keep your loans current.
  • If you have multiple loans with different lenders, you will need to communicate this to each lender and check off the appropriate sections on the IBR that indicates this situation. Your total payment will be divided up proportionately among each lender.
  • If your spouse has qualifying loans, and you filed jointly, the total monthly payment doesn’t change, it simply get divided up proportionately among all of the eligible loans.

Money Saving Tip

  • Your student loan lender requires your latest income tax return to determine your Adjusted Gross Income (AGI) in order to calculate your monthly payment. If you are filling out an IBR during the first quarter of the year, you can use your previous year’s income tax return or the tax return you had just finished. Choose the tax return that shows the lower AGI in order to lower your monthly payments.

Graduated Repayment Plan

The Graduated Repayment Plan is perfect for recent graduates that may initially need smaller loan payments until they can get better established with a better paying job. Although the Standard Repayment Plan pays off the loan the fastest with the least amount of interest, the Graduated Repayment Plan is the next best alternative.

Guidelines for the Graduated Repayment Plan include:

  • The loan payment will increase every two years
  • Payment duration depends upon amount borrowed (12-30 years)
  • Monthly payment can be no less than 50% and no more than 150% of the Standard Repayment Plan
  •  Monthly payment must at least cover the accrued interest.
  • Monthly payment must be at least $25.

What would a typical payment look like under a GRP?

Using the national average for student loan debt in 2016, a student loan balance of $25,000 with an interest rate of 6.8% would have the following payment schedule:

YearMonthly Payment
1-2$198
3-4$240
5-6$292
7-8$355
9-10$432
Standard Repayment Plan = $287

As you can see, using the Graduated Repayment Plan would lower your payments for the first 4 years and increase significantly in the last 4 years.

To calculate what your payment would be under a GRP, you can visit the following website and calculate exactly what you would owe: http://www.finaid.org/calculators/ibr.phtml

Extended Repayment Plan

This is an option for those borrowers that need to pay a lower monthly payment. Borrowers can extend their loan payments for up to 25 years, however, more interest will accrue over the life of the loan during that period of time. Below is a summary of the Extended Repayment Plan:

  • Payments extended up to 25 years
  • Borrowers can choose from a graduated repayment or a fixed repayment
  • Payments will be less than the Standard Repayment Plan
  • Borrowers must have more than $30,000 in student loan debt to qualify for the Extended Repayment Plan

What would a typical payment look like under the Extended Repayment Plan?

Using a student loan debt of $35,000 and an interest rate of 6.8%, the fixed and graduated monthly repayment for 25 years, the Extended Repayment Plan for a fixed payment and a graduated payment would look like this:

Type of PaymentMonthly Payment
Fixed Payment$243
Graduated Payment$198**
The Standard Repayment Plan$402

 ** initial payment for first two years and increasing about $12 every two years

Keep in mind that your payments are lower than the Standard Repayment Plan, but you will be paying on your loans for an additional 15 years.

The Bottom Line on Repayment Plans

While you do have several repayment plans to fit your monthly budget, the Standard Repayment Plan will get you out of debt faster and with less interest. If you cannot afford the Standard Repayment Plan, then the other options are there for you, but you will remain in debt for longer.