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Federal Student Loans? Choose Your Repayment Options Wisely!

federal student loan repayment optionsYou finished your education and are going out into the wide world. Unfortunately, your student loans are in tow behind you. How you pay them back depends on you.

Under the federal guidelines, there are a few standard options for repayment of your student loans. Whereas most people choose the repayment option given to them, others may find better terms in another plan.  As a student loan lawyer, I see lots of people who have made the wrong choice but didn’t realize there were other federal student loan repayment options.

If you choose not to make a choice, you will automatically be placed in a standard repayment plan. FFEL borrowers are given 45 days from the date they’re told to make a choice, and Direct Loan borrowers have their repayment plan chosen by the U.S. Department of Education – unless they decide otherwise.

Here’s a breakdown of each type of plan offered.

Standard Repayment Plan

A standard repayment plan will typically come with the highest monthly payments, and you may either pay a fixed amount per month or a variable amount based on the interest rate of the loan. In either event, the standard repayment plan comes with a term of 5-10 years.

Though the amount you pay each month is highest with the standard repayment plan, you’re done with your student loan payments faster than with any other repayment option. Therefore, you’ll pay less money in interest charges over the life of the loan than with any other option.

If you’ve got the ability to do so, my opinion as a student loan lawyer would be to choose the standard repayment plan.

Graduated Repayment Plans

Under a graduated repayment plan, you’re going to start with a low payment but the monthly amount due will increase through the 10-year repayment period. If you’re entering a line of work that starts with an exceptionally low salary but increases rapidly over time, this may be a good idea for you.

If you choose the graduated repayment plan, you’ll pay more for your loan over time than under the 10-year standard plan. Still, for those who are starting out with a low income this could be your better option.  Yo don’t need to be a student loan lawyer to realize that sometimes the better choice isn’t always the most financially sound one.

Extended Repayment Plans

If you owe more than $30,000 in principal and interest, the extended repayment plan lets you pay your student loans a fixed or graduated payment schedule for a period of up to 25 years. If you got your a Direct Loan before July 1, 2006 you can take advantage of an extended repayment plan of up to 30 years.

Under this option, you’re paying more than under any other student loan repayment scheme. You’re stretching out your payments far beyond the 10-year term of the standard or graduated repayment options, and you’re paying less at the beginning – leaving more money to accrue interest over time.  Do yourself a favor and steer clear of this student loan repayment option if you can do so.

If You Choose The Wrong Standard Repayment Option

When you’re faced with paying your federal student loans, the standard repayment options can be daunting. After all, you don’t know your long-term financial prospects or what the future holds.

Fear not, however. If your chosen path doesn’t work out you can always elect a different payment plan for your federal student loans. And if none of the standard ones work out, there’s always an income-based options you can choose.

Image credit:  stevendepolo

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By |December 5th, 2012|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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