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The Complete Guide to Federal Student Loan Repayment

September 21, 2020

The following article is from Centsai

You're just months away from graduating and staring down the barrel of tens of thousands of dollars in student loan debt. The world's economy is struggling, and you are worried about being able to repay your loans in time. What now?

If you have federal student loans, you're in luck. Well, as much luck as you can have with student loan debt. The good news is that federal loans offer various student loan repayment options for borrowers after they graduate, so you're not just stuck with one payment plan.

Tackling Your Student Loan Debt

To start with, it is important to see how much you owe — find out via the National Student Loan Data System. This tool should provide you with your full federal loan balance. If you have private student loans, you should contact the lender directly.

After that, your next step should be to visit the Federal Student Aid website, which will continually provide updated information about student loan debt.

While you research which repayment option to use, be aware that most federal loan applicants will have a six-month grace period after graduation, during which there are no loan repayments at all.

If you don't choose a plan after you graduate and start paying back your loans, you'll automatically be enrolled in the Standard Repayment Plan.

But you have more options than that and if you just graduated or are about to, you want to know what they are. Here's a breakdown of federal student loan repayment options:

Standard Repayment Plan

As mentioned above, this is the plan you'll be enrolled in automatically, if you don't choose a plan. Through the Standard Repayment Plan, you'll have 10 years to pay off your student loans. Payments are a fixed amount of at least $50 per month, according to Federal Student Aid.

This is the best option if you can afford it, because the sooner you can repay your loans, the more money you'll save on interest.

"[Standard Repayment Plans] work best for those with a competitive salary in their first job after college and for those who want to pay off their loans quickly," says Lori Auxier, director of student success at the Educational Credit Management Corporation.

This plan isn't recommended for people who don't have a job yet, have a lower salary than expected, or plan to seek Public Service Loan Forgiveness (PSLF)," Auxier adds.

With the Standard Repayment Plan, it's also important to note that you can pay more than your fixed payments and get out of debt in less than 10 years.

One mistake I made when I first graduated was looking at my student loans as a bill, and paying just what I was told to pay.

Federal student loans do not have prepayment penalties. I could have shaved a few years off of my student loan repayment by paying more than the minimum.

Graduated Repayment Plan

Through the Graduated Repayment Plan, your initial payments will start out small and gradually increase every two years. The thinking behind this is that as time goes by, your income will go up, and you can afford larger payments.

"This is a good option for those with a lower starting salary and the potential for a higher salary in a few years," says Auxier. "This plan will result in paying more over the life of the loan and is generally not a qualifying repayment plan for PSLF."

This plan offers student loan repayment periods between 10 and 30 years. This may be a good option if your income is low now, but you are expecting wage increases in the future.

Extended Repayment Plan

If you have significant debt and your monthly payments are outrageous, you may want to consider the Extended Repayment Plan, which allows you to pay back your loans within 25 years, according to Federal Student Aid. Your payments can be fixed, meaning they'll stay the same, or graduated, meaning they'll increase over time.

"This is a good option for those who need a lower monthly payment and more time to pay off their loans, or if they expect to earn a lower salary over time," adds Auxier. "This plan will result in paying more over the life of the loan and is not a qualifying repayment plan for PSLF."

To qualify for this plan, you must have more than $30,000 in outstanding loans. Under this plan, your payments will be much lower and much more spread out. The downside? That increased lifetime cost can be nearly double your initial balance because of the additional interest, according to FinAid. This plan should be entered into lightly, often as a last resort.

Income-Based Repayment (IBR)

If you're currently struggling to get by, Income-Based Repayment can be a blessing. This plan caps your monthly payments at 15 percent of your discretionary income and allows you to pay your loans over up to 25 years, according to Federal Student Aid. After 25 years, any remaining balance will be forgiven.

However, there are some things you should know. First, you need to qualify. Typically, if your student debt would be a significant portion of your annual income, you'll qualify. Your student loan payments must also be lower than what they might be under the Standard Repayment Plan.

While you may have affordable payments under IBR, you will end up paying more in interest.

And if the remaining balance on your loans is forgiven at the end of the 25-year period, that amount may be considered taxable income, according to the same source.

In other words, if $40,000 is forgiven, you could see a tax bill of several thousand dollars, as current tax law will consider that $40,000 in forgiven loans as income.

Pay As You Earn

This is another plan that can help you if you are struggling to repay your student loans. Pay As You Earn generally involves monthly payments at 10 percent of your discretionary income.

Under this plan, your student loan repayment period is 20 years.

"These plans cap payments at 10 percent of a borrower's income. [They] require annual recertification and will result in paying more over the life of the loan," says Auxier. "However, the outstanding loan balance after a certain timeframe (depending on loan type) is forgiven. These plans are qualifying repayment plans for PSLF."

As with IBR, for this plan you must qualify based on your income. However, the IBR tax trap still remains and you may see a hefty tax bill if your loans are forgiven.

Income-Contingent Repayment Plan

This plan is one of the only income-driven plans for which you don't have to qualify. Under Income-Contingent Repayment plans, your payments are calculated each year based on a number of factors: your adjusted gross income, discretionary income, family size, and the total amount of loans you have.

"These plans let borrowers pay 10 to 20 percent of their discretionary income," says Auxier. "[They] result in paying more over the life of the loan; however, the outstanding loan balance after a certain timeframe (depending on loan type) is forgiven. These plans are qualifying repayment plans for PSLF."

Your repayment period is 25 years and only after that can any unpaid portion be forgiven, according to Federal Student Aid. Once again, you may have to pay income tax on your forgiven loans.

Which One Should You Choose?

As you can see, there are a variety of options to choose from. But which one is right for you? Well, that depends on your income and how quickly you want to pay off your loans.

Be aware that student loan repayment has changed slightly, due to COVID-19. "For borrowers currently in their grace period on federally held student loans, interest rates are set to zero percent on those loans until December 31, 2020," says Auxier. "If possible, it's still a great idea to make payments during this time to pay down the balance more quickly."

If you can afford it, the Standard Repayment Plan is likely your best option to repay those loans. If you're struggling, consider using IBR until you can afford more.

You can make arrangements with your loan servicer to set up a federal student loan repayment plan. The key is to do your research and pick a plan that is best for your financial situation.

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