Federal student loan repayment plans
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:
- Two of them help you pay off your debt quickly to minimize total interest charges:
- The other five are hardship-based programs that focus on lowering your monthly payments:
- Income based
- Income contingent
- Income sensitive
- Pay as you earn
- Revised pay as you earn
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.
Consolidation vs. Repayment
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.