Whether you need to pay off credit card debt, federal student loans or back taxes, a debt repayment plan may be your best option
10 min read
The term “debt repayment plan” can refer to a few different things. In the simplest terms, it can refer to a personal pay off plan that you set up to eliminate debt. More formally, you can enroll in debt repayment plans to pay off specific types of debt in the most efficient way possible. The goal is usually to find the fastest way to get out of debt with the lowest interest charges. This helps you avoid things like bankruptcy and save your credit score from damage.
In general, repayment plans can apply to any debt you owe that doesn’t involve collateral – i.e. unsecured debt. Depending on the types of debt you need to pay off, you may need several repayment plans, each one handling a specific type of debt.
Each type of repayment plan is described in more detail below.
When you have high interest rate credit card debt to pay off, this should be the first thing you try. You basically want to organize your debts, work with your creditors to find the most efficient way to reach zero on each balance, then prioritize them for payoff. It’s also known as a debt reduction plan.
Results with creditor negotiation can vary. Your success depends on a few factors. If you’ve been a longtime loyal customer who always pays your bills on time, negotiation is more effective. You may also have success if your credit score has improved since you opened the account. If you’ve already missed payments, habitually pay late or you reached your credit limit, negotiation is often tougher.
If a creditor agrees to an adjusted repayment schedule, you may have to agree to freeze your account. This means you can’t make any new charges until you complete the plan.
When you can’t get your creditors to work with you, professional help can make all the difference in the world. A debt management program is a repayment that you set up through a credit counseling agency. By voluntarily seeking out a credit counseling service to work with them, it shows creditors that you’re serious about paying what you owe.
In this situation, a certified credit counselor helps you find one consolidated payment that will fit your budget. Then they call each of your creditors to negotiate. It’s basically the exact same thing you do yourself. The difference is that these agencies have established relationships with creditors and proven records of helping other people get out of debt. So, even when a creditor won’t work with you, they often sign off on your enrollment in a DMP.
When it comes to student loans, repayment plans generally only apply to federal student loans. If you need to find a better way to pay off private loans, the lender usually directs you into refinancing or debt consolidation.
For federal loans, there are basically seven different plans you can use:
If you don’t choose a plan, federal loan servicers enroll you in a standard plan automatically. With hardship programs, you must certify your income and family size to qualify and recertify each year. These plans extend the term of repayment to 20 years or more.
There is one more option that tries to split the difference between lower interest charges and lower payments. It’s called an extended repayment plan. This can be used to extend the term on a standard or graduated plan from 10 years to 25. It can lower your payments without the hassle of income certification. However, the payments will not be as low as what you can achieve with hardship programs.
An IRS tax repayment plan is known as an Installment Agreement (IA for short). You and the IRS agree to a repayment schedule for one or more years of back taxes. You can set up these plans yourself through the IRS website. However, if you owe more than $10,000 or your tax debt is complicated, you may be better off hiring a tax resolution specialist.
If you’ve started researching options for debt relief, you may have already come across the term “debt consolidation.” This is where you combine multiple debts into a single monthly payment. It sounds very similar to debt repayment plans, which often also allow you to pay off what you owe with one payment.
The difference is usually who you owe the debt to once the plan starts. With consolidation, you usually owe a new creditor or lender. For instance, you use a debt consolidation loan to pay off your credit cards. You no longer owe your creditors; instead, you owe the lender.
By contrast, you usually still owe your original creditors when you enroll in a repayment plan. For example, on a debt management program, you still owe your creditors even though you enroll through a credit counseling agency. You make the payment to the agency, but they distribute the money amongst your creditors on your behalf; the agency is just a go-between.
