Managing Student Loans and Payment Options
Student loan payments can be very high and may impact the price range of home you are able to qualify for. Due to the large number of students who struggle with student loan debt, there have been recent changes to student loan repayment options that help students, particularly those who have obtained higher levels of education.
When it comes to managing both your debt and your budget, selecting a payment plan for student loans will make a significant impact on your monthly expenses. The traditional student loan is paid back over a 10 year period with equal monthly payments during that time. With student debt for physicians often topping $150,000 or more this could lead to payments of over $1,700 a month (based on a 7% interest rate), which can rival a mortgage payment.
While some physician’s loans are processed without including the student loan debt payments, the payment amount must be considered in your personal budget as you determine how much home you are able to afford. Today changes made to the student loan repayment process, gives borrowers more affordable options, which can help you keep your budget in check.
Student Loan Repayment Options
The Standard Repayment Option provides a fixed payment over 10 years. This plan is applicable to subsidized, unsubsidized (Direct and Stafford) and PLUS loans. Under this repayment plan you will pay the least amount of interest and pay the loan off in the shortest amount of time.
Graduated Repayment Option is still paid off in 10 years but payments will gradually increase every two years over the 10 year repayment period, giving you time to build a practice that can accommodate higher loan payments. This plan is applicable to subsidized, unsubsidized (Direct and Stafford) and PLUS loans.
Extended Repayment Option can extend the loan repayment to 25 years. With this option you can select fixed payments or graduated payments, depending on your budgeting needs. This plan is applicable to subsidized, unsubsidized (Direct and Stafford) and PLUS loans. Payments will be lower than the 10 year option but you will pay substantially more in interest over the life of the loan. There is no prepayment penalty, giving you the choice of making higher payments when possible. To qualify for this repayment option you must have $30,000 more in outstanding loans in either the Direct and/or Stafford loans, independently.
Income Based Options
The next four options are income based options. With all these options you must submit tax returns each year, and your payments are established based your income. (This is household income, even if you only have loans from one spouse.) It is possible to combine loans from both spouses, when establishing the monthly loan payments.
Income Based Repayment Option also known as (IBR) can be extended to 25 years. This loan repayment option uses your discretionary income to determine your loan payment up to a maximum of 15%. The process allows you to include Direct and Stafford Loans, both subsidized and unsubsidized, and adds consolidated loans to the list. Under this plan, any outstanding balances after 25 years of payments can be forgiven. Payments are based on income, family size and the state you live in.
Pay as You Earn Repayment Option also uses income to determine the payment. With this program a maximum of 10% of discretionary income is the maximum payment and has a 20 year repayment period. Payments are based on income, family size and the state you live in. This option covers Direct Loans and Direct Plus loans made to students, along with consolidated loans. Qualifying loan balances after 20 years of payments can qualify for loan forgiveness.
Income Contingent Repayment Option also known as ICR can be extended to 25 years. It includes Direct Loans, Direct PLUS Loans made to students and Direct Consolidation Loans. Payments are calculated based on income and will change from year to year based on income, family size and total loan balances. Outstanding balances after 25 years can be forgiven.
Income Sensitive Repayment Option is the ICR’s equivalent for Stafford Loans and also includes FFEL PLUS Loans and FFEL Consolidated Loans. Monthly payments are based on the annual income and repayment is up to 10 years.
For more detailed information about the student loan repayment options and to get calculations of monthly payments for your specific circumstances visit https://studentaid.ed.gov/repay-loans/understand/plans.
General Repayment Rules
Repayment plans can be changed to meet your changing financial needs. If you are struggling with making payments it is best to contact the servicing company early, as they do report to the credit bureau and it will negatively impact your credit if you miss payments. The loans do have options that can temporarily postpone payments due to financial hardship, unemployment and other circumstances, if needed.
Managing student loans effectively will help you maintain high credit scores, which are required to qualify for loans and mortgages of any kind.