Federal Student Loans – Repayment Options

Student Loans are generally not discharged in Bankruptcy, but there are repayment options available. If you have a federal student loan, there are several repayment options available.

These options include:

• Standard Repayment Plan
• Graduated Repayment Plan
• Extended Repayment Plan 

The standard repayment plan is the plan offered by your lender. You will make loan payments for up to ten years. With this plan, your monthly payments are higher than in other plans, but your total number of payments is lower because you are paying less interest.

The graduated repayment plan is where payments start out low and increase throughout the repayment period, typically every two years. This option is a good choice for people who will be working in a profession where their income will increase quickly once they are established in their career.

An extended repayment plan is one that allows you to spread out your repayment over a period of up to 25 years, depending on the amount of your loans. In order to be eligible for the extended repayment plan, you must have an outstanding balance of over $30,000 on your loan. While your monthly payments are lowered on the extended plan, you will end up paying more in the end, due to additional interest payments.

Lenders also offer the ability to combine an extended repayment plan with a graduated repayment plan, allowing you to further lower your payments. However, your overall costs will be further increased, due to all the additional interest.

There are additional repayment options available for those who are having difficulty making their payments.

If you gave a federal Direct loan, except for PLUS loans, you can choose an income contingent repayment plan. Payments on this type of plan can be as low as $0-5 per month. However, if your payment is lower than the accrued interest each month, the loan principal will continue to increase. After 25 years, the government will cancel the remaining balance on this type of loan, and the IRS will treat the canceled debt as income.

If you have a FFEL loan, you could qualify for income-sensitive repayment plan. These plans base your payments on your annual income, family size, and total loan amount. Payments must cover at least the accruing interest and the loan must be paid off in ten years.

People with Direct loans and/or FFELs are eligible for income based repayment plans. You cannot qualify for an IBRP if you are in default. These plans offer more flexible options than ICRP and ISRP plans, and your debt is eliminated after 25 years of payments. Payments can be less than the accruing interest.

If you have a Perkins loan, your payments must be at least $40 per month. However, the school may extend repayment for another ten years, or allow additional extensions for people with prolonged illnesses or unemployment.

Contact your local provider for further information about Hardship payment plans.

If you fall behind your payments, or are having trouble making your payments, it is important for them to talk to your lender. Communication is extremely important, in order to resolve your delinquency and avoid default which will damage your credit options such as a forbearance and alternate repayment agreement which may be available to you if you are struggling with your loan payments. There are options such as a deferment, forbearance, and is added to the principal balance of the loan at the end of the time of forbearance.

Forbearance agreements were designed for people with temporary financial woes that are inhibiting their ability to make their payments. The idea is to give borrowers time to resolve the problems that are causing them to fall behind on their payments. For example, if you are temporarily out of work, a forbearance agreement will give you time to find another job so that you can resume making your loan payments.
Richard Croce - Rich@rrc-llc.com