College and University Blog
Default Prevention: Understanding Your Student Loan Repayment Options
Comparatively speaking, the pressures of college life and its level of responsibility when paired with the pressures of the working world are rather dulcet. Reality never seems to hit more bitterly when a graduate is faced with the combination of an unforgiving job market and the black cloud of astronomical college loan payments looming on the horizon.
This reality is not too far off for one recent college grad I know who graduated with almost $100,000 in student loan debt and a degree only worthy of a near collapsed industry. While other possible employment opportunities came up void, the discouraged graduate found himself six months later pushing carts at Wal-Mart for a meager $7.75 an hour and owing a lender $1,125 per month on his student loans, an amount that entirely exceeded even his gross income for a full month of work.
If you are a graduate who is being confronted by this type of circumstance, it is best to understand your options. Unfortunately, defaulting on your student loans is NOT an action that will be easy to correct in the future nor does it benefit the lender. Most lenders will be inclined to work out some sort of arrangement. Here are some options:
Loan Repayment Alternatives
If your payment does not fit into your monthly budget, your next step is to discuss with your lender other repayment possibilities.
Income Sensitive Repayment
The Income Sensitive Repayment program (ISR) is an option available to those who received loans through the Federal Family Education Loan Program (FFEL). The purpose of this repayment resource is to allow low-income borrowers the ease of loan remittance by lowering monthly payments based upon a fixed percentage of the borrower’s gross monthly income. However, the monthly payment must be greater than or of equal value to the amount of interest accumulated.
Borrowers must apply for ISR on an annual basis, providing proof of income, W-2’s, etc., based upon specific lender requirements. Typically, there is a 10-year limit to an Income Sensitive Repayment arrangement. After which, the remaining interest is applied, and the payments increase to compensate for the staved portion of the balance.
Income Contingent Repayment
The Income Contingent Repayment (ICR) plan is similar to the above ISR plan as its purpose is to accommodate borrowers pursuing low-income employment such as public service by lowering monthly payments. However, ICR is only made available through the U.S. Department of Education and excludes all loans through banks and private organization as well as FFEL loans (government insured loans).
Monthly payments are calculated based upon the borrowers income, family size and the total amount borrowed. The maximum life of repayment under this plan extends to 25 years. After that time, any remaining debt is forgiven and made as taxable income. Additionally, interest that isn’t covered by the low monthly payment is capitalized or added to the principal each year; however, interest capitalization is capped at 10%.
Income-based Repayment
Like the Income Sensitive and Income Contingent Repayment plans, the Income-based Repayment (IBR) plan is designed to lower monthly payments for students with lower salaried jobs by capping the monthly payments equal or under 10% of the loan holder’s monthly gross income. Lower payments are calculated based upon the borrowers income and family size and are adjusted annually on those components. Loan forgiveness for the remainder of the loan balance can also be offered to those who have made 300 or more qualifying payments on or after July 1, 2009.
The Income-based Repayment plan is only available to those who received funding from government loan programs such as Stafford, Grad PLUS, and consolidation loans. Loans through the Direct Loan Programs and the Federal Family Education Loan Program are also available to receive IBR privileges. NOTE: Parent PLUS and consolidated Parent PLUS are not eligible as well as loans from the Perkins program and private institutions. However, consolidated Perkins loans are eligible to receive IBR benefits.
Graduated Repayment Schedule
The Graduated Repayment Schedule is a benefit that lenders provide to the loan holder under the premise that when the graduate advances in their occupation, he or she will earn initially a modest salary and then build into a higher salary over a period of time. Therefore, the loan repayment schedule begins with lower payments, mainly interest, and payments increase as the life of the loan continues.