Student Loan Repayment

When taking out student loans it is important to remember that you will eventually be responsible for paying them back, with interest. Keeping your repayment amount low is a multi-step process. First, you must borrow the lowest amount necessary to complete your education. Second, you must understand the multiple repayments plans available. Third, you will want to see if you qualify for any student loan forgiveness programs. This article focuses on the second step, understanding repayment options.

Types of Loan Repayment Plans

There are two types of loan repayments students can choose which are the standard and income driven loan repayments. There are four standard repayments: Standard, Graduated, Extended Fixed and Extended Graduated. With the standard and graduated plans students have 10 years to pay off their loan, and under the extended fixed and graduated fixed students have 25 years.

Income Driven Repayment plans

There are 5 different income driven repayment plans, however most students today will most likely fall within three: the Income Based Repayment, Pay as you Earn and the Revised Pay as you Earn.

In an income driven repayment plan students are required to pay either 10% or 15% of their discretionary income. The formula used to determine a student's discretionary income is: Adjusted Gross Income - Poverty Level = Discretionary Income. Students who have all direct loans can qualify for the Pay as you earn or Revised Pay as you Earn income driven repayment option, which requires students to pay 10% of their discretionary income. Borrowers who chose to enroll in the Pay as you Earn or Income Based Repayment will have 20 years to pay off the loan, and borrowers enrolled in the Revised Pay As You Earn have 25 years to pay off the loan. If loans are not paid off in the allotted time, then borrowers will receive taxable forgiveness. Meaning the remaining loan amount will be taxed at the end of the year.

Important Notes

There are a few things to note about the repayment plans. If a student is married and does not want their spouse's income to be considered in the determination of how much monthly payments would be, they would have to file their taxed married filing separately and would only be eligible for the Pay As You Earn option. Also, students who have the old Federal Family Educational Loan can only qualify for the Income Based Repayment option, which requires students to pay 15% of their discretionary income.