6 Different Ways to Pay Off Student Loan Debt

Many students graduate college with sizable student loan debt that they assume will be paid off in a few years' time. However, whether because of unemployment, low-paying entry level work, or other accumulated debts, these same students often encounter extreme difficulty with paying off their student loan debt.

Unfortunately, repayments on student loans must be made soon after graduation or termination of studies. For a Federal Stafford Loan, the grace period is 6 months, and for a Federal Perkins Loan, the grace period is 9 months (1). Furthermore, student loans cannot be discharged by simply filing for bankruptcy, unless the student loan debt "would impose an undue hardship on the debtor and the debtor's dependents (2)." Since the U.S. Bankruptcy Code does not clearly define what constitutes undue hardship, cases where student loans are successfully discharged through bankruptcy are rare.

The "standard" student loan repayment plan requires a fixed amount to be paid each month, with the student having up to 10 years to pay off the loan in full. However, there are other repayment plans that work more closely with the student in order to help him or her pay off the student loan. Many of these payment plans take into account the student's earnings and employment, while others allot up to 25 years for repayment.

1. Extended repayment. The student can pay either a fixed or graduated (i.e. increasing year-to-year) monthly amount on the loan for up to 25 years (3). The loan must be at least $30,000 or more.

2. Graduated repayment. This payment plan allows the student to start repaying the loan with very low monthly amounts. The amounts are increased every 2 years, and the entire loan term runs 10 years.

3. Income based repayment (IBR). This new repayment option is only available for federal student loans. To qualify, the student must have a certain amount of debt relative to his or her income (4). If found eligible for the IBR plan, the student's loan payments will be less than 10% of his or her income. Also, if the student earns below 150% of the poverty level, he or she pays nothing on the loan. If the student's income is above that threshold, the payment is capped at 15% of income.

4. Income contingent repayment (ICR). ICR is intended to help those students who intend to work or who already work in public service. Because public service jobs typically pay less than other jobs, the ICR plan takes into account the student's salary, family size, and total loan amount before setting a repayment amount. Also, the payments are adjusted yearly. After 25 years, any remaining loan balance is discharged. Only students who have federal direct loans are eligible for ICR.

5. Income sensitive repayment (ISR). Students who have obtained federally guaranteed loans may qualify for an ISR plan. The ISR plan operates much like the ICR plan in that it calculates repayment amounts to income and is available for students who hold jobs in the public service arena. Unlike ICR, however, the ISR plan is limited to a 10-year repayment period.

6. Consolidated loans. Consolidation of many loans into one loan can help lower the final interest rate of the debt, since the interest rates of all the loans are averaged (7). Also, if the student has at least one federal loan, he or she may be able to apply a specific federal loan repayment plan to all of the loans.

Resources:

1. Repayment Information http://studentaid.ed.gov/PORTALSWebApp/students/english/repaying.jsp

2. Bankruptcy and Financial Aid http://www.finaid.org/questions/bankruptcy.phtml

3. SallieMae: Extended repayment http://www.salliemae.com/after_graduation/manage_your_loans/repaying-student-loans/starting_repayment/extended_repayment.htm

4. IBRinfo http://www.ibrinfo.org/what.vp.html

5. FinAid Income Contingent Repayment http://www.finaid.org/loans/icr.phtml

6. FinAid: Income Sensitive Repayment http://www.finaid.org/loans/isr.phtml

7. FinAid: Student Loan Consolidation http://www.finaid.org/loans/consolidation.phtml