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You’ll Pay for This: Choosing The Right Repayment Plan

After going to law school, I like to think that I have a pretty high threshold for the “I have no idea what I’m doing” feeling and can ultimately figure most things out with enough research. However, when it was time to figure out which repayment plan I should use to start paying back my law school loans, I was in tears of confusion in 5 minutes flat.

I was immediately paralyzed by questions, such as “Why are there so many options?”, “Why do they all sound the same?”, “How do the payments range from $0 to $3,000?”, “How do I make sure I don’t, under any circumstances, get the $3,000 one?”, and “Should I take out a loan to pay someone to figure out how to pay these loans off for me?”

On the one hand, I’m extremely grateful that there are different payment plans. On the other hand, why so confusing federal government?

This month, I’m going to do my best to help you understand repayment plans and terms simply and discuss some important considerations to take into account with each option. I probably can’t make you loovvveeee this topic, and that is okay. Frankly, I don’t really love it either, but my goal is to keep you from having the same epic meltdown I had.

Before you embark on this journey, you need to figure out your exact goals. All the options I will discuss below hinge on 3 factors: amount of monthly payment, amount you will pay over time, and length of time you will pay. Knowing which of these is the most important factor to you upfront will save you time, energy, and a lot of tears.  

Two other important considerations are that not all loans are eligible for all repayment plans and that any part of your loan that is forgiven is subject to being taxed.

I recently input my loan information into the Federal Student Aid Repayment Calculator and learned a lot of interesting information about my repayment options. Luckily, it confirmed that I am currently on the best repayment plan for my situation at this time!

Below, I have included the chart of my repayment options that was generated for me based on the information I provided. Let’s go through and unpack the information in this chart to better understand loan repayment options and how to make the best decision when it comes to choosing a plan.

Standard Repayment Plan

  • Monthly Payment: Highest throughout
  • Amount Paid Over Time: 5th highest
  • Length of Loan: 10 years
  • Other Considerations: no part of the loan is forgiven, all borrowers are eligible
  • Consider if: You want to pay off your loan quickly and you have the income to do so.

Graduated Repayment plan

  • Monthly Payment: Starts medium, ends extremely high
  • Amount Paid Over Time: 4th highest
  • Length of Loan: 10 years
  • Other Considerations: No part of the loan is forgiven, all borrowers are eligible.
  • Consider if: Your income is going to significantly increase over time.

Extended Fixed Repayment plan

  • Monthly Payment: Medium throughout
  • Amount Paid Over Time: 2nd highest
  • Length of Loan: 25 years
  • Other Considerations: No part of the loan is forgiven, not all borrowers are eligible.
  • Consider if: You’re looking for a long repayment option.

Extended Graduated Repayment plan

  • Monthly Payment: Starts medium, ends high
  • Amount Paid Over Time: Highest
  • Length of Loan: 25 years
  • Other Considerations: no part of the loan is forgiven, not all borrowers are eligible
  • Consider if:  You have absolutely no other options, as a last resort.

Revise Pay as you Earn Repayment Plan

  • Monthly Payment: Starts low, ends medium
  • Amount Paid Over Time:2nd lowest
  • Length of Loan: 25 years
  • Other Considerations: There are tax consequences applied to the portion of the loan that is forgiven, many borrowers are eligible, based on 10% of your discretionary income, calculated annually, considers both you and your spouse’s income even if you file separately.
  • Consider if: You want a low payment plan over a long period of time.

Pay As You Earn (this is my current repayment plan)

  • Monthly Payment:Starts low, ends slightly higher but still low
  • Amount Paid Over Time: Lowest
  • Length of Loan: 20
  • Other Considerations: There are tax consequences applied to the portion of the loan that is forgiven, many borrowers are eligible, based on 10% of your discretionary income, calculated annually, spouse's income only considered if you file jointly, has some date restrictions on when the loans were taken out.
  • Consider if: You have a high debt to income ratio.

Income Based Repayment

  • Monthly Payment: Starts low, ends medium
  • Amount Paid Over Time: 3rd highest
  • Length of Loan: 25
  • Other Considerations: There are tax consequences applied to the portion of the loan that is forgiven, many borrowers are eligible, based on 15% of discretionary income, calculated annually,  spouse's income only considered if you file jointly, for borrowers who were issued their first loan before July 1, 2014.
  • Consider if: You have a high debt to income ratio.

IBR for new borrowers

  • Monthly Payment: Starts low and ends slightly higher but still low
  • Amount Paid Over Time: Lowest
  • Length of Loan: 20 years
  • Other Considerations: There are tax consequences applied to the portion of the loan that is forgiven, may borrowers are eligible, based on 10% of discretionary income, calculated annually, spouse's income only considered if you file jointly, for borrowers who were issued their first loan after July 1, 2014.
  • Consider if: You have a high debt to income ratio.

Income Contingent Repayment

  • Monthly Payment: Starts medium, ends slightly higher but still medium
  • Amount Paid Over Time: 3rd lowest
  • Length of Loan: Custom
  • Other Considerations: You may or may not have some of the loan forgiveness and therefore you may or may not have tax consequences, many borrowers are  eligible, your monthly payment is the lesser of 20% of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, calculated annually, spouse's income only considered if you file jointly.
  • Consider if: You need a more customized plan.

Remember,when you put your own loan numbers in different repayment plans may be better for you than they are for me. But, this will help you understand how it works!

A quick note on deferment and forbearance. While these are not repayment options, they are terms that may appear on the same applications as repayment plans. These are temporary hardship programs that allow individuals to temporarily stop paying their loans. The main difference is that under deferment you may not be responsible for the interest that accrues while the loans are deferred, but with forbearance you are responsible for all of the interest that accrues.

Finally, if you participate in the Public Interest Loan Forgiveness program, there is a box you can check when entering your information into the repayment calculator, and it will adjust the plans accordingly.

My Student Loan Stats as of 4/18/18:

  • Years out of law school: Almost 5
  • Amount Owed: $228,319.95 
  • Total increase from last post: $269.98
  • Payment Made: $331.02 (same as last month)
  • Original loan: $156,162

Don’t miss next month’s article which will be non-stop-thrill-ride topics on loan refinancing and consolidation.

Thoughts on this article? Want to share your own story? Tips for this column? Or just want to connect? You can reach me at info@vincoprep.com or find me over on LinkedIn.

 

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