What are the repayment options for consolidation loans?
In an effort to give student borrowers more flexibility in how they repay their loans, there are four types of payment plans to choose from. In all cases, it's a good idea to shop around and compare the different repayment plans from lending institutions because terms vary from one lender to the next, and you might be able to get a better deal from another lender.
The first is the standard plan, and it’s pretty straightforward: fixed monthly payments for up to 10 years.
Second is the extended repayment plan. This plan allows you to extend the length of loan up to 30 years. However, the repayment terms may differ based on the balances of your loans. For example, if your loan balance was less than $12,000, a lender may allow you up to 12 years to repay your consolidated loan. If your loan balance was more than $60,000, then you will be given up to 30 years to pay that back. An important note: other education loans that aren’t being included in your consolidation loan may count toward the “loan balance” calculation that determines the length of repayment for which you qualify.
The third option is graduated repayment. This plan is best-suited for someone who needs lower payments during the first couple of years and then will be able to handle higher payments during the remaining years. Payments increase every two years, and no single payment can be more than 3 times greater than another. However, any time you take off from paying on the principal of the loan will probably increase the loan’s total amount.
A fourth option is income contingent repayment. In some situations, your payments will be based on your monthly income, amount you borrowed, your employment status, and other factors. Your payment will adjust annually as your work situation changes. It’s relatively hard to qualify for this plan, but if your income is going to be very low, you might want to check out this option. As with the Graduated Repayment plan, this plan will probably increase the total cost of the loan (principal + all interest).
Finally, there is income-based repayment (IBR). Borrowers apply annually for IBR by submitting documentation of the borrower's adjusted gross income (AGI), plus the borrower's spouse’s income (if applicable), family size, and the total amount of Direct Loans. To qualify, the borrower must have over 15% of income above 150% of federal poverty level for the borrower's residence to pay off the loans on a standard 10-year payment plan. For most eligible borrowers, IBR monthly payments will be less than 10 percent of their income or less for borrower's with the lowest earnings.
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