Student Loans 201: Repayment

After your finished studying and the days of classes are far behind you, those lovely loans that helped you live lavishly throughout college pop back up. Fortunately, the federal government has a great "exit counseling" when you leave college. It pretty much tells you the terms and conditions of your repayment and your rights as a borrower as well as your newly found adult responsibilities.

For Stafford (or federal loans), there are a few types of repayment plans. They allow for the student to choose the best one that fits their needs.

Standard Repayment is at a fixed payment for 10 years or less. Pro: you pay less in interest; Con: payments are much higher.

Extended Repayment (without consolidation) is only available to those with at least $30,000 in outstanding principal from a single lender. Your payments can be fixed (like the standard repayment plan) or graduated like the fourth option below). The most time you have to pay off the loan is 25 years. Pro: you have lower monthly payments; Con: you accrue much more interest and it takes longer to make a significant impact on your principal. 

Extended Repayment (with consolidation) is very similar to the option above but your repayment term can be extended to 30 years. You do however, have to consolidate all your debt. The Pros and Cons are the same. 

Graduated Repayment begins with lower monthly payment increasing over the next two years. You typically have 10-30 to repay the loan depending on your total principal. Pro: you have lower payments while you're trying to find a job if you don't already have one; Con: you accrue more interest as you're initially paying less towards the principal.

Pay As You Earn Repayment is based on a portion of your discretionary and you must show some financial hardship. There are some additional qualifications but as new borrowers you would hit them. You only have to pay on these loans for 20 years. Pro: after 20 years, you no longer have to pay back the loan and the monthly payments are lower; Con: you can be taxed on the portion of the loan you do not repay and you're paying on that bad boy for 20 years. 

Income-Based Repayment is very similar to the option above. The payments are capped at 15% rather than 10% of  your discretionary income. The other major difference is that you have up to 25 years to repay your loans and after the 25 years you no longer have to pay anything on your loans. Pros and Cons remain the same. 

Income Contingent Repayment is like the two options above but you're capped at 20% of your discretionary income. You have 25 years to repay and anything beyond that time frame is forgiven but subject to tax law.  Pros and Cons remain the same.  

Income Sensitive Repayment is based on a fixed rate of your income, rather than just your discretionary income, and must be repaid in 10 years. The one caveat is that you have to be a federal family education loan program (or FFELP) borrower. Pro: your monthly payment is a little lower than the standard repayment plan; Con: you'll accrue more interest on the plan, costing you more.

Note that most of the plans have a minimum monthly payment of around $25-50. Does that all have your head spinning yet? Mine sure is.