A student is required to sign a promissory note when she or he borrows money from the US Department of Education. The note, however, does not have specific repayment terms. What happens is that when you finish of leave school, you will be contacted concerning what payment plan will be applied to your loan. You have the following options:
- Standard Repayment- the loan is for a term of 5-10 years; your payment goes to interest and principal so that the balance is paid in 60-120 payments. This payment plan usually has the highest monthly payment. At the same time, with a standard payment you pay the least amount of interest over the term of the loan. If you do not pick a payment plan, DOE will default you into a standard plan.
- Standard (post 2006)- For Direct consolidation loans, the standard repayment option calls for a 10 year repayment if the amount due is less than $7500 and is extended to 30 years if the amount due is equal to or greater than $60,000.
- Graduated Repayment- payments start low but increase over the term of the loan which is 10 years. This option works for students who expect to see steady increases in salary over the period.
- Extended Repayment- if the amount due exceeds $30,000, then you can repay on a standard or graduated repayment basis for up to 25 years.
- Income Driven Plans (IDR)- this is a generic term for repayment plans that are based on income. You must specifically apply for a particular IDR program or you can request that the servicer put you into what it believes will be the least expensive program for you (do not recommend that approach). You have to re-apply each year and provide proof of your income. After you have made required payments for the term of the plan (20-25 years), the balance is forgiven. However, that balance is reported to the IRS a debt forgiveness income and you may be liable for taxes at that time,
- IDR’s include the following: Income Contingent Repayment (ICR), Income Based Repayment (IBR), PAYE plan and REPAYE Plan. Each program has its own requirements and terms.
- If your income is low enough, the payment under a given IDR can be less than the interest that is accruing on the loan(s). In such case, the interest is being capitalized into the principal, and the balance actually gets larger.
- You are not locked into one repayment plan during the term of your loan. In fact, many students switch repayment plans to suit their specific needs at the time.
Repayment plans have specific eligibility requirements, especially IDR’s. In many cases, it makes sense to consult with an experienced practitioner in this field to understand what your options are, and you obligations for each option.