How To Choose The Best Student Loan Repayment Plan
Eliminating debt accumulated during the time spent in college is the first priority for every fresh graduate, but not all of them approach this task with the right mindset.
An average college graduate enters the job market with a heavy financial burden in the form of loans, usually totaling tens of thousands, inherited from the study days. That means true financial independence is still quite a few years away, even after landing a steady, well-paying job. If the student loans aren’t managed well, the debt can spiral out of control and create a long-term obstacle that won’t be easy to clear. That’s why it’s mandatory to consider all available student loan repayment options and pick one that best suits the realistic circumstances of your particular case.
For a great majority of students, the creditor is the U.S. government and consequently they might be entitled to one of several repayment programs that take economic hardship into account. Applying for one of those could be the right decision for anyone without secure means of repaying the borrowed sum quickly, and could significantly ease the pressure during the early career building period. Just be mindful that not all repayment plans are created the same and be sure to examine the details of each offer very carefully before coming to the final choice.
Overview of Student Loan Repayment Plans
Generally speaking, student loans come in various shapes and forms, and the same kind of diversity is present among the repayment options. All programs described in this article are run by the federal government and as such are not applicable to debts towards private lenders. The objective of the programs is to ensure that most recent graduates are able to meet their obligations without sacrificing their purchasing power and they accomplish this by extending the due date and proscribing conditions of repayment. In this way, former students can deter a large chunk of their debt until a time when their revenues are already well established.
There is a wide variety of available plans, differing in all essential parameters such as duration, monthly sum to be paid, range of eligible borrowers etc. In practice, that means it is possible to find a well suited plan for almost any situation, offering a long term solution for young people who still don’t know where their careers will take them. The plans last for up to 30 years and feature a payment dynamic agreed in advance, with longer variations coming with lower monthly payments but taking more a disciplined effort to endure. Compared to commercial consolidation loans, these governmental programs are very favorable and can be viewed as a kind of a subsidy for educational purposes.
The Different Types of Repayment Plans
There are two main groups of repayment plans – standard and income-based. The difference between them is mostly in the way how monthly installments are calculated, with the first group assigning the amounts to be paid equally to all borrowers while the latter uses current income as the basis for determining the monthly sum. While any borrower can apply for a standard plan, income-based opportunities are typically limited to people in the lower earning brackets.
Each of the groups features several distinct subtypes adjusted for specific customers. Here is a quick classification of all government-backed repayment plans:
Standard repayment plans
Income-based repayment plans:
- Income-Contingent Repayment (ICR))
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Income-Based Repayment (IBR)
- Income-based Repayment for New Borrowers (New IBR)
Each of the listed plans has subtle characteristics that make it unique among all the others. It is highly recommended to learn more about them before settling for one option or another, since there could be hidden benefits in some of them that would be very helpful down the line.
When it comes to determining who can or can’t apply for a certain student loan repayment plan, the devil is in the details. As was previously mentioned, only debt to the United States government can be covered by such programs and any loans made by private banks or other institutions must be handled separately. However, even students who borrowed exclusively from the government might be limited in their choice of plan by several factors, including their ability to pay. Income-based loans in particular might be off limits to students with significant revenues or assets, as they are primarily designed to provide assistance to those in need of relief.
In order to be approved for PAYE or IBR loan repayment programs, former students have to prove they meet the ‘Partial Financial Hardship’ criteria. This means they need to show their family income doesn’t exceed a certain threshold defined by the government based on macroeconomic data. New IBR and PAYE also have certain limitations regarding the period in which the debt was incurred, but alternative plans such as REPAYE don’t include any similar provisions. Because of this, certain groups of graduates will be prevented from applying to some plans, even if they would otherwise be incentivized to choose them. Checking for eligibility is thus an integral part of the decision-making process that should be taken very seriously and conducted thoroughly, including direct inquiries from the responsible governmental bodies in cases that may be ambiguous in any way.
Amount of Monthly Payments
The most important number that every debtor wants to know is how much he needs to pay when the next installment comes due. With repayment plans, the sum that needs to be returned on a monthly basis can be either fixed or floating, depending on the type of a plan chosen and the exact agreement with the government. For income-based plans, the amount is directly proportional to person’s current earnings, with those who make less also paying less. The basis for the calculation is the difference between a person’s gross income and 150% of the poverty line, a variable known as discretionary income in the financial circles.
In most cases, the monthly installment on a repayment plan is set at 10% of discretionary income for that month. IBR plans are an exception in this sense, since they require 15% of discretionary income to be directed towards settling the debt. Both PAYE and IBR plans have a defined upper limit for payments that corresponds to the amount that would be paid on a standard 10-year plan, but REPAYE doesn’t have any limits of this kind since this program isn’t tied to partial financial hardship provision and is intended to provide proportional obligations for people in the higher income brackets.
Since student loans are repaid for a long time, every bit of relief means a lot. Any tax deductions that can be realized along the way will alleviate some pressure and make debt management easier. Good news is that some of the repayment plans come with tax benefits, as applicants can typically choose whether to file their tax documents individually or together with their spouse in case they are married. REPAYE plans have less flexibility and must be based on joint household income rather than personal revenues alone. These differences may seem small on the surface, but they significantly affect how much of your money stays in your pocket.
Another very attractive feature of government-sponsored repayment plans is that a portion that still remains outstanding after a set period of time can be forgiven. This typically happens after 20 years, although for some schemes the deadline is set on 25 years. In addition to direct cancellation of debt, all of the income-based plans discussed here fall under the Public Service Loan Forgiveness (PSLF) program. This federal program nullifies any remaining debt after 120 payments, without any taxation on the forgiven portion of the debt. Again, these benefits might not be available to all borrowers, but it makes sense to ascertain which may be at hand as soon as you start considering your loan repayment plan.
Making the Final Decision
As you can see, there is a wide range of tools that can be used to bring the accumulated student loans under control and ensure that solvency is maintained at all times. It would be imprudent to ignore the advanced options and stick to a standard solution even when you don’t have to, especially since all the info is easily available. Switching to an income-based plan could potentially be a true life-saver, buying you additional time to get your finances in order after you start working full time.
Exploring the existing repayment plans is the first step to make, but this must be done with a realistic estimation of future income in mind. A plan that seems like a good idea today might not be the best one in five years, so it may be smart to be conservative when planning ahead. The advantage of income-based plans is that the amount due every month directly depends on the size of your paycheck, so you can never get bogged down with too large monthly obligations that submarine your entire family budget.