The number of different student loan repayment plans can make it difficult to figure out if one fits your needs – and bank account. Borrowers can choose from nearly 10 different payment arrangements. When it comes to repaying your federal student loan, there is a lot to consider. Understanding the details of repayment can save you time and money. The government has a variety of programs available for student loan borrowers meeting eligibility requirements.
Loan Consolidation: Only federal student loans are eligible for consolidation. The borrower must have at least one Federal Direct Loan or Federal Family Education Loan (FFEL) Program Loan and the loans must be in grace period or repayment. The borrower must also have graduated, left school, or dropped below half-time enrollment to qualify. The loans to be consolidated must not be in garnishment, and should amount to more than $20,000.
Public Service Loan Forgiveness (PSLF): In order to qualify for PSLF, it is required that the borrower must (1) work full-time at a qualifying public service organization, (2) be enrolled in a qualifying repayment plan, (3) make 120 scheduled monthly payments—paid on time and in full—on his or her Direct Loans. The main purpose of this program is to increase the appeal of working in the public service sector.
Payment Plans: Besides the Standard (10 Year) Repayment Plan typically implemented for federal student loans, the government offers the following alternative repayment plans: Income-based repayment, Income-contingent repayment, Pay as You Earn and Public Service Loan Forgiveness (PSLF). Eligibility for income-driven plans depends in part on the type of student loans borrowed and the date they were first disbursed.
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Some significant changes make the latest income-based plan new and improved. With the old plan, any amount left on a loan after 25 years of repayment – or 10 years if you work in the public or nonprofit sector – and 300 eligible payments, is forgiven.
That requirement drops to 20 years and 240 payments with the new plan. In addition, the old plan limits payments to no more than 15 percent of your discretionary income. That limit is 10 percent for the new plan.
In order to qualify, you have to have a partial financial hardship. This means that your income-based payment would need to be lower than your regular monthly payment.
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Like the old IBR, your remaining loan balance is forgiven after 25 years of payments – 300 total. Income-contingent repayment caps your potential payments at 20 percent of your discretionary income. Income-contingent repayment also does not count loans outside of the direct loan program when calculating your total debt. This could make your potential payments under income-contingent repayment even more expensive than they would be under the income-based plan.
This is the only income-related payment plan that Parent PLUS loans are eligible for, and even then they must be consolidated under the direct loan program before applying for income-based repayment.
Pay As You Earn
Both plans offer forgiveness after 20 years or 240 payments, as well as payment caps at 10 percent of your discretionary income. However, Pay As You Earn comes with stricter eligibility requirements, which may make it more difficult for you to qualify.
To qualify, you must be a new borrower as of Oct. 1, 2007. That means you either have no federal loans made before that date or you paid off all prior federal loans before borrowing again on or after that date.
In addition, you must have at least one Stafford loan or Grad PLUS loan disbursed on or after Oct. 1, 2011. You can also have a consolidation loan as long as the consolidation did not repay any loans disbursed prior to Oct. 1, 2007.
President Barack Obama has proposed expanding eligibility to all federal loan borrowers but that option will probably not be available until late 2015. To initially qualify for Pay As You Earn, you must have a partial financial hardship.
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