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Finding my optimal payment plan: What are my options?

Posted on August 30, 2018

The average student loan debt for college graduates is $37,000, which can be as much as a full year’s salary for new teachers.1 With the long and hard hours that new educators face, managing your monthly student loan payments can be an added, unwelcome stress.

However, there’s more than one way to make your student loan payments. Let’s put each one in its simplest terms.

Standard payments

Standard payment plans can be very expensive; the shorter the duration, the higher the payment. This payment plan can be either 10 years or 25 years, and the monthly payment amount remains level over the duration of the repayment period. If the loan amount exceeds $50,000, the standard repayment plan becomes 25 years. Payments made on the 10 year standard plan qualify for Public Service Loan Forgiveness (PSLF), but payments made on the 25 year standard plan do not qualify for PSLF—but more on this forgiveness option later.

Graduated and/or extended

Many educators may hear the term “graduated” and think, “sounds great, I just graduated!” Congrats, grad! But how can these help you? Loan servicers, the companies that manage the billing and servicing on your federal student loans, can provide borrowers alternatives to standard payment plans by offering extended or graduated loan terms. Unlike a standard payment plan, graduated payments will allow you to make smaller payments initially. Every two years, your monthly payments will increase, giving you some time to get comfortable in your career before repaying the bulk of your loan.

Loan servicers can also offer extended repayment plans, which increase the duration of repayment to 15, 20, 25 or 30 years.

Graduate and/or extended repayment plans generally do not qualify for Public Service Loan Forgiveness.

Income-driven repayment plans

Often the best for teachers, these plans match monthly payments to a formula based on the income, household size, debt owed and interest rate owed by teachers. There are four types depending on your family circumstances.

  • Pay As You Earn (PAYE): The monthly payments in this payment plan cannot exceed 10% of your discretionary income (an income determined by which state you live in, family size and how much you make). This plan is only available for Direct Loans and does qualify for Public Service Loan Forgiveness. Only new borrowers as of 10/1/07 may qualify for PAYE. Find out if you qualify for this type of repayment plan.
  • Revised Pay As You Earn (REPAYE): In 2015, the PAYE was revised to help make more people eligible. Like the PAYE, your payments will be capped at 10% of your discretionary income. This plan is only available for Direct Loans and does qualify for Public Service Loan Forgiveness.
  • Income Based Repayment (IBR): This repayment plan considers your discretionary income with a different formula than PAYE/REPAYE. However, if eligible for IBR, your monthly payments would be limited to 10% or 15% of your disposable income,2 depending on your eligibility. This plan is available for both Direct Loans and Federal Family Education Loans (FFEL) but only payments made to Direct Loans under this repayment plan will qualify for Public Service Loan Forgiveness.
  • Income Contingent Repayment (ICR): This plan uses the lesser of: either 20% of your discretionary income or what a fixed payment would be over a 12 year term, adjusted for income. This is frequently the highest monthly income payment yet it is the only income payment method available for Parent Plus loans, after a Direct Consolidation is completed. This repayment plan is only available for Direct Loans and does qualify for Public Service Loan Forgiveness.

Private loan repayment plans

Private loan repayment plans are created by private lenders, such as banks or credit unions. Accordingly, their terms will vary based on the institution. Payments are frequently based on your credit score and the amount you borrowed. Payments may vary or remain level, depending on the terms of the loan.

Additionally, private lenders often offer both variable and fixed interest rates, as well as varying duration terms. Keep in mind that differences in repayment duration will affect the payment amount. For example, if you owe $40,000 and plan to pay it back in five years, you will have a higher monthly payment than if you elect to pay it back in 10 years. That is, longer repayment periods typically correspond with lower monthly payments and more paid in interest.

In what cases would you have a private repayment plan? Typically, private loans are used to fill the gap between what you are allowed to borrow from the government and what you still need to cover the cost of school. It’s fairly common to take out a private loan to supplement a federal loan. Additionally, individuals that come from households with higher incomes may not be eligible for federal loans. In either one of these instances, you’ll most likely have a private repayment plan.

Loan forgiveness

Choosing payment plans can be a bit overwhelming, but there’s a light at the end of the tunnel for public school educators. The Public Service Loan Forgiveness (PSLF) program is intended to encourage individuals to work full-time in public service jobs, including public education. So how does it work? After you have made 120 (10 years) qualifying monthly payments while teaching full-time, the PSLF program will forgive the remaining amount of your non-defaulted federal loan. To register for the PSLF program, submit the Employment Certification Form.

There are many repayment estimators to help you decide which repayment plan is right for you, and you can always speak with a trusted professional to talk you through the different repayment options that may be available for your loans.

1National Education Association

2Your disposable income is the difference between your adjusted gross income and 150% of the federal poverty level relative to domicile state and family size.

AM-C04289 (May 18)

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