Taking Advantage Of Student Loan Repayment Plans

There’s over $1.2 trillion of college debt in America. It’s true that people who attend college earn higher wages, however, it’s quite a pricey endeavor as college expenses consistently outpace the rate of inflation. Once you’ve graduated and are on your own, you have a short 6 month grace period before payments on your federal student loans are due. And depending on whether or not you’ve found employment by then and how much you earn, it can take years till you’ve finally become free of that hefty college bill.

That’s why when it comes time to pay your student loan, it’s important to carefully review all the payment plans offered to make repaying easy and drama-free. You have to take into consideration your income level, cost of living in your state and other pertinent factors so that you can ensure making timely monthly payments. Thankfully, the government offers various options to help assist borrowers in successfully paying off their loans and avoiding delinquency or default which can result in garnished wages, calls from collection agencies and raised interest rates on car or home purchases.

Choose a repayment plan

Ideally, you want to spend the least amount of money in interest when paying off your loan and you’ll do that ultimately with the standard repayment plan. However, because of financial hardship, you January have to choose a different option that allows lower monthly payments and longer terms to avoid delinquency or defaulting on your loan. Unfortunately, this will increase the amount you spend over the life of your loan because the longer your term is, the more interest you’ll pay.

Here’s a rundown of common repayment plans:

  • Standard Plan: Direct and Stafford loans, subsidized and unsubsidized, and all PLUS loans are eligible loans under this plan. You’re required to pay at least $50 a month for up to 10 years. Also, you’ll pay less interest when compared to other payment plans.
  • Graduated Repayment Plan: You start off with lower monthly payments that increase over time.
  • Extended Repayment Plan: Your payments can be fixed or graduated and the time frame can be up to 25 years. You must have over $30,000 outstanding in either a Direct loan or the Federal Family Education Loan (FFEL) to use the repayment plan.

Plans that add more flexibility to loan repayment:

  • Income-Based Repayment Plan (IBR): Available since 2009, you’re monthly payment will be 15 percent of your discretionary income (the amount left over when you subtract your adjusted yearly gross income from 150 percent of the poverty guideline for the size of your family and state you reside in). This repayment plan will adjust as your income adjusts and can extend for up to 25 years after which any unpaid balance will be forgiven.
  • Pay As You Earn Repayment Plan (PAYE): Beginning in 2012, the most you’ll pay under this plan will be 10 percent of your discretionary income. Similar to the IBR plan, your payments reflect how much you earn. The limit for this repayment plan is 20 years. After 20 years of faithfully making payments, any left-over amount will be forgiven. This is a good plan for those who want lower monthly payments.

All forgiven loan amounts will be seen as taxable income which will ultimately lower any tax refund you might receive.

Tips on ensuring you make your monthly payments

Keep a budget – Budgeting is a useful practice that can help give you a clear idea of where your money is going. And unlike previous generations, there are easier ways to manage your finances with the help of technology. Budgeting software like You Need A Budget (YNAB), Mint.com or PearBudget offers simple tools that allow you to stay on top of your money. You can have all your financial information like latest transactions or balances updated automatically, view charts and graphs that help give you a better idea of your expenses and keep envelope budgeting neat and clean without dealing with actual envelopes.

Apply for scholarships – If you’re still in school, avoid taking any more out in loans by paying most of your college education with scholarships and grants. Researching organizations, private companies and individuals that offer free cash for school is, of course, one of the wisest financial moves you can make. Preferably, you’d want as much money as possible to come from these awards as they don’t have to be paid back.

Working overtime – If you feel you’re just barely hanging on with your monthly payments, working overtime will help immensely. This doesn’t have to be a long-term solution either. Simply work enough overtime to be able to build a buffer – excess money that you don’t need for monthly expenses – in your checking account. If you can increase the amount of income you earn over your monthly expenses for 3 to 4 months, then you would have built up a buffer. This will be helpful so that when encountering a financial hardship, you can dip into your buffer to help cover any bills.

Lance Mann offers lists of easy scholarships to college students via his blog EasyScholarshipsNow.com. Additionally, you can find other useful money saving tips there as well.


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