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Loan Repayment Options

Loan Repayment Options

A humorist once said that there are two things about a bill: always question it and never pay it until you’ve exhausted all the other options.

Funny, yes, but not a strategy that will have fortune smiling upon you when all is said and done.

No, the options I’m talking about here are your repayment options. These are the different ways and methods of repaying your loan, depending on what type of loan your received, what your obligations are for repaying that loan, and the timetable for doing so.

Let’s examine the most common loan repayment options:

Standard Repayment – In a standard loan repayment scenario, you just pay the principal and interest that has accrued on your loan, usually on a monthly basis for the duration of the loan repayment term.

A standard loan repayment option is by far the most common form of paying back student loans. You pay your loan back loan in equal monthly payments over, for example, a 10-year period or 120 equal payments. The minimum monthly payment might be as low as $50, but the actual monthly cost depends on your loan balance and interest rate.

Let’s say, hypothetically, that you borrowed $20,684, including the full amount of the debt, plus interest. With a standard repayment schedule, your monthly obligation to your student loan lender would be $174 per month for 10 years.

The beauty of the standard repayment schedule is that it’s like clockwork. The bill arrives on the same day every month asking for the same amount from you every month. It’s simple, but simple is good when your life grows complicated after college.

Graduated Repayment – With graduated repayments, you start small and work your way up. As I mentioned before, lenders understand that, chances are, you won’t be a lean, mean big paycheck-making machine when you first get out of school. Your big earning years will come later. To accommodate that reality, lenders offer graduated payment plans where your loan can be paid off in smaller, and the increasingly larger regular amounts as you earn more money. Of course, if you get a good job right out school where you earn good money, go ahead and pay as much as you can on your student loan. Remember that the idea is to pay it off as quickly as possible. That’s not necessarily the case with graduated repayment plans.

If, for example, you snagged a student loan directly from the government, your starting payments may be half of what they would be under the standard plan (there is no minimum amount, but your payment can never be less than the monthly interest due). Then they'll increase every two years, for 10 to 30 years. Your monthly payments will never rise to more than 150% of what the monthly payments would be under the standard plan.

With other loans you might pay only the interest on your loans for a few years. After that you'll pay both principal and interest on the loan until it’s retired.

Earnings-Based Payment – Again, lenders often get a bad rap that they have no heart and are after your money and little else. But the earnings-based repayment plan, otherwise referred to as an “income sensitive” plan, like the graduated repayment student loan plan, says different. It says that lenders acknowledge that everyone isn’t paid like a Vanderbilt and that they will work with borrowers to come up with monthly bills that can accommodate the borrower’s budget. As long as the lending institution is getting their money from you on a regular basis - - even in smaller amounts like the earnings-based payment plan – than they’re relatively happy.

That said, there are some caveats involving income sensitive loans. Repayment of your student loans under this option takes into consideration the amount of income you make, or total gross monthly income. Your monthly payment is then based on the amount of your income. Under this option:

You have to come absolutely clean about all of your received.
The income information you give to your lender cannot be more than 90 days old.
You don’t make the call – your lending institution does. They determine whether you qualify for the income-sensitive repayment option.
Your payment plan is liable for review annually by your lender.

Extended Repayment -- Not the ideal repayment option for the student borrower, the extended repayment plan factors in long periods of time where you can’t pay your student loan and gives you more time to do so. About 25 years worth of time. So if you are disabled or lose your job and can’t find another one, the lender will “string out” your loan timetable up to 25 years. Of course, as they do that, your lender will string out and increase the interest payments you’ll be paying as well. Still, it’s nice to have an extended option in your back pocket if things break down, which hopefully won’t happen.

Postponing Repayment

If your loan payments are huge or if you’ve hit tough economic times head on, even the most generous payment plan might not make ends meet. In some instances, you can – for the moment at least -- postpone paying your loans or reduce the amount of your payments. These periods of relief are known as deferments (where Uncle Sam pays your interest) and forbearances (where the money you owe keeps going up because interest payments aren’t being paid). We’ll talk more about deferments and forbearances later on in our discussions of student loans.

Published Jan 27 2007, 10:19 AM by moneycoach
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