Consolidating your federal student loans allows you a few different repayments options. For some basic information on them, please view our FAQ page. This page explains the basic information and also provides you with information on when it may be wise to choose one repayment plan over another.
Each plan has its own variety of benefits, and we are not in the business of trying to force a specific plan on any particular client. Our clients review the options and make the decision that they believe will benefit them the most in the short and long term. The four repayment plans are the Standard Repayment, Graduated Repayment, Income Contingent Repayment, and the Income Based Repayment.
Income Based Repayment
The Income Based Repayment plan is the most unique plan. Many times, it is also the most beneficial to our clients. The most obvious benefit to this plan is the fact that it provides forgiveness on the first three years of unpaid interest from when you enroll into the Income Based Repayment plan for the subsidized portion of your loan. This works out for many to be a form of instant forgiveness on their loans, because otherwise they would have to pay the interest.
For example, someone with a loan amount of $40,000 and an interest rate of 6.8% would have $8,160 of interest forgiven in their first three years from when their Income Based Repayment begins. Assuming your payment is not zero, you are likely not paying off your complete payment. You will receive forgiveness on the difference.
Another benefit of the Income Based Repayment is that it generally offers the lowest payment for borrowers experiencing economic hardship or difficulties. The amount of your payment can never exceed 15% of your adjusted gross income over the poverty line for your family size. If you are married and file with your spouse, your spouse’s student loan indebtedness can be taken into account as well, which can further lower your payment.
If any of the following circumstances sound like yours, consider the IBR plan:
- You are experiencing financial hardship and would like some relief temporarily
- You qualify for a payment of zero, or a payment less than the monthly interest payment on the loan. This will allow for that interest to be forgiven on the first three years.
- You do not foresee a large increase in your income in the future, and see yourself always qualifying for a zero payment. In this case, your student loan would be completely forgiven at the end of the term.
The calculation for the Income Based Repayment is: AGI – (Poverty Line x 150%) = Y (Y x .15) / 12 = IBR
In the case of the standard repayment plan, the payment on your loan is calculated like any other normal loan payment. It is based on both the size of the loan and the term. The term is always based on the size of the loan, in which case you can use the chart below.
The standard repayment plan can be a good option for you if any of the following issues sound familiar to you:
- You want to pay off the loan as soon as possible, and you currently have less than 30 years left on the term.
- You do not qualify for an income based repayment plan because your income is high.
- Your loan amount is small enough where you can be paying a minimal amount over a short period rather than extending it for another number of years.
If you make your payments quickly and on time, you will pay less interest on a standard repayment plan than you will under the graduated, and this plan would probably be best for you in that case.
Sometimes our clients find that they do not qualify into either of the Income Based Repayment plans, so they do not see a benefit of consolidating their loans into a Standard Repayment plan when their current payment is almost identical. It might seem confusing, but this is actually misleading, since one of the major benefits of this consolidation is the flexibility with repayment plans available to you, no matter your circumstances.
If you find yourself dealing with economic hardship at any time in the future, let us know, and we will change your repayment plan into an Income Based Repayment plan. This prevents you from falling into default on your loans. In many cases, your payment can decrease even to zero. This is not a deferment status, which essentially pauses your term. You would have a zero payment for however long your hardship lasts. Your term will continue to move forward—and this is where the forgiveness aspect of the plan becomes very important. Once your term is over, your loan will completely be forgiven. This aspect of the plan is often overlooked by clients who were not aware of how hugely beneficial this could be to them in the long term.
Graduated Repayment Plan
The graduate repayment plan is similar to the standard repayment plan in that it is calculated the same way. However, there is one major difference. For the first few years under the graduated plan, you only pay interest on the loan. Because of this, the graduated plan is always less than the standard repayment plan—at least in the beginning. After two years, it increases. The term of the loan is the same as the standard, and is based on your loan amount.
The graduated plan might be the best bet for you if any of the following circumstances have affected your life:
- Your income is high enough that the income-based programs do not apply to you, or you don’t even qualify.
- You want to have a slightly lower payment right now, but you are comfortable with the idea of them increasing over time.
- You expect your current job to have regular raises in pay, and you expect to be able to pay the increase of the payment every couple years without it causing you financial distress in the future.
One of the negative consequences of the Graduated Repayment Plan is the fact that the total amount you will pay on the loan will be more than you would be paying on the standard repayment plan, because you are only paying off the interest for the first two years, and even into years 3-4 you may not be paying off the principal as fast as you would be under a normal schedule. You are left paying more through the life of the loan with the benefit being lower payments to start off.
Again, consider the forgiveness aspect of the loan, as this is very important. If at any time you find that you cannot make the payments due to an unexpected circumstance that causes you to lose your job or decrease your total income, please approach us. We can have your repayment plan changed for you so you do not suffer through making payments that cause undue hardship on you and your family. During this time your term would continue with a significantly lower payment, and at the end of the term the loan would be completely forgiven.
The calculation for the graduated repayment is: PMT = (Loan Amount * Interest Rate) / 12
Income Contingent Repayment
The Income Contingent Repayment plan combines a few different income-related factors to determine what your payment will be during your Student Loan Repayment. This plan calculates your payment two different ways, and then allows you to use the lower of the two payments. One calculation is your Adjusted Gross Income (AGI) over the poverty line for your family size, multiplied by 20% for an annual payment (divide by twelve for monthly payment). This calculation does not take the loan size into account whatsoever.
Payment = ((AGI – Poverty Line) x 20%) / 12
The second calculation does include your loan value, along with the income factor, which is determined by the federal government, and a constant multiplier. The second method is used to calculate your total payment. Whichever of the formulas gives you the lower payment is used, and the other is disregarded.
You could benefit greatly from this plan if any of the following situations are causing you and your family distress:
- You are suffering financially and need relief.
- You cannot foresee yourself earning a higher income in the future and would like to be eligible for student loan forgiveness. Under this repayment it is not expected that you will have paid everything off at the end of the term, so forgiveness is quite likely.