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Student Loan Repayment Plans: What You Need to Know

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For student loan repayments, the standard term on most federal student loans is 10 years, but that doesn’t work for everyone. And no matter what repayment plan you choose or are assigned when you start repaying your loans, you can always change it. If you have private student loans, you’ll have to check your loan agreement or talk to your lender about what sort of repayment options you have. If you have federal student loans, you have a variety of ways to pay back your student loan debt.

What Happens if I Bungle My Student Loan Repayment?

If you should neglect your student loan payments for more than 270 days and your loan goes into default, the federal government can do the following:

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    • Deduct your loan payments from your paycheck.
    • Withhold any state and federal income tax refunds and apply the refunds to the amount you owe.
    • Notify the credit reporting agencies about your default, thereby damaging your credit score and making it difficult for you to qualify for a car loan, home loan or even a credit card. (You can see how your student loans are affecting your credit by looking at two of your credit scores on Credit.com.)
    • Charge you late fees and collection costs on top of the amount you owe.
    • Deny you federal student aid if you decide to go back to college.
    • Sue you in court for the outstanding balance, plus attorneys’ fees and court costs.

    If you think filing for bankruptcy will make your big, bad federal student loan debt go away, think again. Federal student loans are rarely discharged in bankruptcy.

    It’s essential that you be serious about making your student loan payments from the get-go; your student loan servicer can tell you what you need to do to change your repayment plan. Repayment terms range from 10 years to 30 years, depending on the amount owed and the repayment plan selected. Keep in mind that your repayment options will depend on the type of loans you have, as well as a variety of other factors.

    Here are the plans available to federal student loan borrowers:

    • Standard Repayment: With standard repayment, you pay a fixed amount each month over a 10-year repayment period (up to 30 years if you have a consolidation loan).
    • Graduated Repayment: With graduated repayment, you begin with small payments and work your way up to larger payments during the course of your repayment period. Your payment amount usually increases every two years. Your repayment term is up to 10 years (up to 30 years if you have a consolidation loan).
    • Extended Repayment: With extended repayment, you can pay a set or graduated amount each month, but your repayment term is stretched out. An extended repayment term can last up to 25 years. With this payment plan, your monthly payment is lower than it is under the standard repayment plan, but you wind up paying more interest over the life of the loan.
    • Income-Contingent Repayment (ICR): Your monthly payment amount is either 20% of your discretionary income or what you’d pay on a fixed-amount, 12-year repayment plan, based on the income you report on your federal tax return, among other things. As your yearly income rises and falls, so do your student loan payments. If after 20 or 25 years you haven’t paid off the loan, any remaining balance will be forgiven.
    • Income-Based Repayment (IBR): Your monthly payments are 10% or 15% of your discretionary income and are recalculated each year. If after 25 years you haven’t paid off the loan, any remaining balance will be forgiven.
    • Income-Sensitive Repayment: Your annual income determines your monthly payment for a repayment period of up to 15 years.
    • Pay As You Earn (PAYE): Your monthly payments are at most 10% of your discretionary income and are recalculated each year. If after 20 years you haven’t repaid your loans in full, the remaining balance will be forgiven.
    • Revised Pay As You Earn (REPAYE): Your monthly payments are 10% of your discretionary income and are recalculated each year. If after 20 or 25 years you haven’t repaid your loans in full, the remaining balance will be forgiven.

    Most federal loans have a grace period of six months after you graduate, leave school or drop below half-time enrollment before you have to start making payments, so you have a bit of time to contemplate which repayment plan may be right for you. Many of the repayment plans can help you make affordable payments while you work toward Public Service Student Loan Forgiveness. It’s also important to know that you may have to pay income taxes on any forgiven loan balances.

    You may be able to nudge down the interest rate on your student loan by agreeing to pay your loans online or by allowing payments to be automatically deducted each month from your checking or savings account. Setting up an automatic payment is a quick and convenient way to pay your student loans. You won’t have to write a loan check every month, and your payment will always be on time. Just make sure there is enough money in your account to cover the payment every month.

    If you ever find yourself struggling to meet your federal student loan payments because of unemployment or economic hardship, contact your lender and ask about options for temporarily postponing or reducing your payments through deferment or forbearance.

    With deferment, you may have a right to postpone payments under a variety of circumstances. For example, you may defer your loans for up to three years while you’re unemployed or unable to find full-time work. You may also defer your loans for up to three years during a period of economic hardship, such as Peace Corps service. And depending on the type of loans you have, the federal government may pay the interest on your loans while payments are deferred.

    If you’re not eligible for a deferment, you may still be able to receive forbearance. Forbearance is a temporary postponement or reduction of loan payments for up to 12 months. Unlike a deferment, you are responsible for the interest on the loan during forbearance, even if you have a subsidized loan. Remember, deferment and forbearance are not automatic — you have to request them from your student loan servicer. No matter what sort of repayment program you’re in, be sure to make your loan payments on time until your new repayment structure has been approved. You’ll lose these benefits if your student loan falls into default, so be sure to contact your lender at the first signs of financial trouble.

    Christine DiGangi contributed to this article. This article has been updated. It was originally published August 24, 2010.

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