By: Jeremy Kates0 comments

If you’re an upcoming graduate, you can expect to owe close to $40,000 in student loan debt. If you extrapolate that to monthly payments over 10 years, you can expect to pay around $400 with an average interest rate of 4.6%. If you’re wondering why home ownership continues trend well above average, you can point directly to student loan debt.

While this appears to be a daunting amount for a new graduate to tackle, there are now plenty of payment plans that are likely to lower that monthly payment for most graduates.

Here are some of the more popular options:

Pay as you Earn (PAYE)

This program was originally offered beginning in 2012. It share similarities with the IBR plan (see below), but there are stricter requirements to qualify.

To qualify for this program, you must demonstrate financial need, and you must be a new borrower, which means that you must be a borrower as of Oct, 2007 and received a Direct Loan disbursement on or after Oct, 2011. The final requirement is that your payment must be smaller than wha they would be on the Standard Payment Plan.

Payment Details:

Payments are generally 10 percent of discretionary income. This is calculated by figuring the difference between annual income and 150 percent of the federal poverty guideline that is specific for the size of your family and the state you reside in.

The repayment period is 20 years.

Eligible Loan Types:

  • Direct Plus
  • Direct Loans (unsubsidized and subsidized)
  • Direct Consolidation

Eligible after Consolidation:

  • FFEL
  • Perkins Loans
  • FFEL Plus
  • Federal Stafford Loans

Updated Pay as you Earn (REPAYE)

This is one of the newest payment plans offered. It’s the newer version of the (PAYE) program. While similar, there are some key differences. The biggest difference is that you can be eligible for this program regardless of when you took out your first federal student loan, and you don’t have to demonstrate financial need.

Eligible Loan Types:

  • Direct Plus
  • Direct Loans (unsubsidized and subsidized)
  • Direct Consolidation

Eligible after Consolidation:

  • FFEL
  • Perkins Loans
  • FFEL Plus
  • Federal Stafford Loans

Payment Details:

Payments are generally 10 percent of discretionary income. This is calculated by figuring the difference between annual income and 150 percent of the federal poverty guideline that is specific for the size of your family and the state you reside in.

The repayment period is 20 or 25 years depending on if post graduate loans are included.

Income Based Repayment (IBR)

The income based plan is like the other pay as your earn plans, but it offers the most flexibility. To qualify for this plan, your payments must be lower than they would be on the standard payment plan and you must demonstrate financial need which is income based.

Payment Details:

Payments are typically 10 or 15 percent of your discretionary income. This is calculated by figuring the difference between annual income and 150 percent of the federal poverty guideline that is specific for the size of your family and the state you reside in.

The repayment period is 20 or 25 years. It’s 20 years if you are a new borrower after July 1, 2014. If not, you have a 25 year term.

Eligible Loan Types:

  • Direct Plus
  • Direct Loans (unsubsidized and subsidized)
  • Direct Consolidation
  • FFEL
  • FFEL Plus
  • Federal Stafford Loans

Eligible after Consolidation:

  • Perkins Loans

Income Contingent Plan (ICR)

Like the REPAYE program, the ICR plan doesn’t have an income eligibility requirement. Unlike the other programs, Parent Plus Loans are eligible for this plan only after you consolidate them into a Direct Loan.

This plan is a good choice for those who want a lower payment but many not qualify for the other programs.

Payment Details:

The lesser of the two following options:

20 percent of your discretionary income. This is calculated by figuring the difference between annual income and 100 percent of the federal poverty guideline that is specific for the size of your family and the state you reside in.

The payment amount on a 12 year fixed repayment that is adjusted for income.

The repayment period is 25 years.

Choosing the right plan

While a large percentage of eligible borrowers take advantage of income based repayment plans, they may not always be the best option. If you can afford to make the standard payments, you should do so. Remember most of these plans have longer term repayment periods which means that you will pay significantly more interest over the life of the loan. In the end, you should choose the plan that best matches your affordability level, but it should also meet your long term payment and debt objectives.

 

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