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Eventually you have to pay back your education loans. The day comes when you graduate, get a job and must begin making payments on your debt. Each federal loan must be repaid according to the terms you agreed to when accepting the loan.
The federal education loans will have one of five repayment plans.
Standard Repayment
This repayment plan requires you to pay your loan off within 10 years. Each monthly payment is a fixed amount with a $50 minimum. It applies to student and parent loans.
Extended Repayment
The extended repayment plan allows the loan term for payoff to be extended to 12 to 30 years. The length of the extension depends on the amount of money borrowed. The longer payment period will result in you paying more in interest of course though the monthly payment amount will be lower. The additional interest amount can be substantial if you double or triple your repayment term from 10 to 20 or 30 years. It applies to student and parent loans.
Graduated Repayment
A graduated federal student loan repayment program is a plan where you pay a lower monthly payment the first two years. Every two years the payment is then adjusted upward.
- Loan term may be 12 to 30 years
- Minimum payment must be at least 50% of the standard repayment amount
- Maximum payment cannot be more than 150% of the standard repayment amount
- Minimum payment must be at least $25 or the accrued interest amount, whichever is higher
This federal student loan repayment plan is designed to help new college graduates by allowing lower payments when starting a new career upon graduation. The assumption is that income will rise over a period of time and the loan repayment amount can be periodically increased. It applies to student and parent loans.
Income Contingent Repayment
The income contingent repayment plan calculates a monthly payment based on the student or parent’s income depending on who is the borrower. The purpose of this repayment plan is to encourage students to pursue lower paying jobs in public service job.
The monthly student loan repayment amount is based on:
- Income
- Total amount borrowed
- Family size
The amount is reviewed each year and the payment changed based on changes in income earned or family size. The maximum repayment term allowed is 25 years and this loan agreement can only be made with the U.S. Department of Education. If the loan is not paid within 25 years, any remaining balance is forgiven.
You can include more than one loan in this repayment plan. The interest rate is fixed, but in the case of multiple loans the rate will represent the weighted average of interest rates for all the loans included in the plan.
There is also an Income Sensitive Repayment plan which bases the monthly federal student loan repayment amount on a percentage of gross income earned each month. The repayment terms extend up to 10 years.
Both the Income Contingent and Income Sensitive Repayment plans apply only to student loans.
Income Based Repayment
One of the newest student loan repayment programs is the Income Based Repayment plan. The monthly payment amount is based on income, but the student loan income based repayment rule sets a cap that references a lower percentage of income than the Income Contingent Repayment and Income Sensitive Repayment plans. It applies only to student loans.
Your student loan repayment rate determines how quickly you will pay off the loan and how much interest you will pay. There is no penalty for prepayment and you can accelerate the principal reduction by making payments that exceed the required monthly amount. You are also allowed to change plans by meeting certain conditions relating to the remaining term of the existing loan.
The many repayment plans available for student loans are designed to help you avoid default on your loans. You should never skip payments. If you cannot make a payment then you should work with the federal loan agency or lender to find a solution. The federal government is ready to help those who honestly need financial help.
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