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Student Loan Repayment Options

Congratulations! You've finally graduated from school and are about to enter the working world, but you still have that little problem of repaying your student loans. Unfortunately, neither private nor federally backed student loans may be discharged in a bankruptcy filing (in accordance with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). However, there are plenty of other options available when it comes to your student loan repayment.

If you have a school-issued loan (like a Perkins loan), you should ask your school about any repayment options that are available to you. If you took out a loan from a private lender (such as a bank), then you may be limited in your repayment options. Whatever the case, it is not advisable to wait until your loans go into default before trying to figure out a solution as some of your options may have evaporated. Also, keep in mind that the holder of your federal loan must allow you to change your repayment plan at least once a year.

Options for student loan repayment discussed in this article are mostly limited to federal loans. If you are not sure what types of student loans you have, visit the National Student Loan System Website or call 1-800-4-FED-AID. See FindLaw's Student Loan Relief and Bankruptcy section for additional articles.

Standard Student Loan Repayment

Although the monthly payments may be higher if you go with a standard repayment plan, it is still probably the best option for you if you can afford it. Because you will be paying more up front, you will probably end up paying less interest in the long run. Under a standard loan repayment plan, monthly payments are determined by the loan amount. However, you can expect to pay roughly $125 per month for every $10,000 you took out in student loans. By using a standard repayment plan, you will only be making payments for a maximum of ten years.

Graduated Repayment Plan

Unlike a standard repayment plan, if you elect for a graduated student loan repayment plan, your monthly payments will increase as time goes by. Normally, your monthly payments will increase every two to three years. However, just like a standard repayment plan, your loan must still be paid off in a maximum of ten years.

However, if you choose a graduated repayment plan, you can expect to pay more for your loan in the long run because you will be paying more in interest than you would under a standard repayment plan.

Income-Based Repayment

If you have had a hard time finding a well-paying job out of school, then you may want to look into an income-contingent student loan repayment plan. Under this income-based repayment scheme, the amount of your monthly payments will vary as your income varies.

Your annual income will determine the amount of your monthly payments. If you are married and file a joint income tax return, your will have to use your joint income to determine the amount of your monthly payments under an income-based repayment plan.

Direct Federal Student Loans: Most direct student loans from the federal government are eligible for income-based repayment plans, excluding PLUS loans. Your annual payment will vary based on your income, but it will never exceed 20 percent of your discretionary income. Your discretionary income is calculated by your annual gross income minus the amount based on the poverty level for your household size.

If you have a very low income, your income-based repayment plan may not require you to make monthly payments at all, or your payments may be less than the interest that your loans accumulate each month. Although this may seem like a big break, it could hurt you in the long run as you may end up paying much more on your loans than you would otherwise.

However, if you have not paid off your student loans within 25 years (not counting periods of deferment or forbearance) on an income-based student loan repayment plan, the federal government will forgive the remainder of your loans. Still, you will have to pay taxes to the IRS on the amount of your loans that are forgiven.

Non-Direct Federal Student Loans: If you received a federal student loan, such as a Stafford, PLUS or HEAL loan, from a financial institution, they will probably offer some sort of income-based repayment plan as well. However, because these loans are not from the government, there may not be any provisions in the agreements for loan forgiveness after 25 years, and the payments may not be as low as they would be from a direct federal student loan.

Student Loan Consolidation and Refinancing

Loan consolidations can be a good idea because it may allow you to lower your monthly payments by grouping several loans together and extending the repayment period. However, keep in mind that because you are extending your repayment period, you will probably end up paying more in interest over the course of repaying your loans. However, consolidation may also allow you to secure a lower interest rate on your student loans, so it may be worth investigating.

There are several reasons you may want to consolidate and refinance your loans. These reasons could include:

  • The monthly payments on your loans are too high but your income is not low enough to qualify you for postponement or deferment.
  • There are low interest rates around and you want to get a lower interest rate for your student loans.
  • You are currently in default on your student loans and you want to qualify for new loans or grants so you can continue your schooling.
  • Not all of your loans are through a direct loan program from the government and you want to get on a income-based repayment plan that your lender does not provide.

There are several different lenders offering loan consolidation, including the federal government. Depending upon the consolidation lender that you select, your student loan repayment options will most likely vary. Keep in mind that, with the exception of only a few types of loans, you will only be able to consolidate your student loans once. 

As tuition has increased and student loans have gotten bigger, it has become more and more popular to consolidate loans. Because of this, many lenders have aggressively marketed loan consolidation. You should compare the different loan consolidation programs available to you in order to find the best deal.

Student Loan Forbearance and Deferment

If you fall on hard times and you just can't meet the requirements of making your monthly payments, it could make sense to postpone your payments or simply reduce the amount you give to your lenders. In general, when you decide to suspend your payments, it is called a loan deferment (when the government pays your interest), or a forbearance (when the interest you owe keeps going up).

It is important that as soon as you experience troubles making your monthly loan payments, it is important to contact your lender as soon as possible to mitigate any harm that may result. Remember that your lender still wants you paying and may have several student loan repayment options for you that you haven't considered.

Check out FindLaw's printer-friendly Guide to Student Loan Debt  (PDF) for a concise summary of loan repayment options and related matters. 

Next Steps
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