Should You Use the Extended Repayment Plan for Your Student Loans? – Councilor Forbes
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For anyone who is struggling to make their student loan repayments, the appeal of an extended repayment plan is obvious. By extending the repayment period, those intimidating payments become much more manageable, leaving you more room in your budget to manage your other financial responsibilities.
But as with almost all types of loan restructuring, this relaxed schedule comes at a cost. It’s important to know what you’re giving up with this trade-off and what your other options are, so that you can choose a repayment strategy that fits your lifestyle and plans for the future.
What is the extended repayment plan?
The extended repayment plan is an alternative for borrowers who are trying to lower their monthly payments. it stretches student loan repayments over 25 years. There is no loan forgiveness available with an extended repayment which is different from other repayment options like the Revised Pay As You Earn (REPAYE) plan or the Income Based Repayment Plan (IBR).
Borrowers will pay more interest overall on the extended repayment plan than on the 10 year standard plan, so only those who have problems with their monthly bills should choose this option.
For example, a borrower with $ 40,000 in loans and $ 50,000 in annual income will pay $ 66,904 total with the fixed extended repayment plan and $ 73,146 with the extended progressive repayment plan. They will only pay $ 51,915 on the IBR or REFUND plan.
Payments can be fixed or progressive. Those who work towards Public service loan discount (PSLF) are not eligible to use the extended repayment plan.
Borrowers must have at least $ 30,000 in loans outstanding to be eligible.
Types of eligible student loans
The following types of federal loans are eligible for extended repayment:
Perkins loans are not eligible for extended repayment, but borrowers can consolidate their Perkins loans into a direct consolidation loan. This makes them eligible for extended reimbursement.
How the extended repayment plan works
The extended repayment plan offers both fixed and progressive payments. The fixed payments remain the same throughout the life of the loan, while the progress payments increase every two years during the life of the loan.
the official loan simulator of the Department of Education shows how much you will pay each month as part of the extended repayment plan with fixed and step payments.
Monthly payment example
Let’s say you have $ 35,000 in direct unsubsidized loans with an interest rate of 4.3%. Under the standard 10 year plan, you would pay $ 359 per month and $ 43,124 in total over the life of the loan.
If you switch to the extended fixed repayment plan, you would pay $ 191 per month and $ 57,177 in total. That’s $ 14,000 more than the standard plan.
Those using the extended phased repayment plan will have a monthly payment of between $ 125 and $ 331. The total amount paid would be $ 62,524, almost $ 20,000 more than the standard plan.
Here’s how the payments would increase every two years:
Extended repayment plan vs. Extended progressive repayment
The monthly payment plan is the same for the duration of the extended repayment plan, while payments under the extended phased repayment plan gradually increase every two years.
Progress payments are designed for low-income borrowers who are expected to increase steadily, such as a new employee in a high-growth industry or a medical resident. Borrowers end up paying more interest with progress payments than fixed payments.
Benefits of the extended payment plan
- Lower monthly payments. The extended repayment plan cuts monthly payments, allowing borrowers to stay up to date on their loans.
- Available for most borrowers. Almost all types of federal loans are eligible for the extended repayment plan, including PLUS and FFEL loans.
Disadvantages of the extended payment plan
- More interest. The most obvious downside to the extended repayment plan is the increased interest that comes with a 25-year term. It becomes more pronounced with more debt. If you owe $ 60,000 in student loans, you will reimburse a total of $ 79,310 under the standard plan. If you choose the extended repayment plan, you will repay $ 114,248 with fixed payments and $ 124,131 with progressive payments.
- No loan forgiveness. Unlike other repayment plans, there is also no loan forgiveness option. If you owe $ 85,000, you will pay back the full amount, plus interest.
- Eligibility rules. Anyone wishing to benefit from the PSLF is not eligible for the extended repayment plan. You must also have at least $ 30,000 in federal loans to be eligible.
Alternative student loan repayment plans
Alternative federal loan repayment options include:
- Progressive repayment plan. the progressive repayment plan differs from the extended phased repayment plan, but it also offers lower initial monthly payments. Payments increase every two years. There is a 10-year term for all loans except Direct Consolidation Loans and FFEL Consolidation Loans, which can last from 10 to 30 years. Borrowers who need smaller upfront payments and don’t want a long term may prefer this plan to the extended phased repayment plan.
- Revision of compensation as you earn (REPAYE). Monthly payments on TO REIMBURSE are limited to 10% of your discretionary income and are reassessed annually. REPAY is available for Direct Loans, Direct PLUS Loans to Students, and Direct Consolidation Loans that do not include PLUS (Direct or FFEL) Loans to Parents. Borrowers with undergraduate loans will have their balances written off after 20 years, and those with graduate or vocational loans will have the balance canceled after 25 years.
- Income Based Reimbursement (IBR). Payments under IBR will be 10% or 15% of your discretionary income. It depends on when the loan was first disbursed. Eligible loans include Direct Loans, Stafford Loans, PLUS Student Loans, and Consolidation Loans which do not include Direct or FFEL PLUS Loans to Parents. Like other income-tested plans, payments can change each year depending on the size and income of your family. The spouse’s income will only count if you file taxes jointly.
- Income Based Reimbursement (ICR). Reimbursement based on income is available for Direct Loans, Direct PLUS Student Loans, and Direct Consolidation Loans. The monthly payment is the lesser of 20% of your discretionary income or the amount you would pay each month on a 12-year fixed repayment plan. Payments are assessed on an annual basis and may change based on your income, family size, and remaining loan balance. The balance is returned after 25 years.
- Income Based Reimbursement (ISR). the income sensitive plan is only one option for FFEL loans including Federal Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans. Direct loans are not eligible. The Income Based Program has a 10 year repayment schedule and payments vary based on your income. This reimbursement method is not eligible for the PSLF because it is only available for FFEL loans, which are not eligible for the PSLF.
- Standard repayment plan. Borrowers who can afford high monthly payments should stick to the standard 10-year repayment plan. This plan has the lowest total interest rate and the payments are fixed for the term of the loan.
Before switching to a plan with an easier monthly payment, first check if there are any expenses that you can cut from your budget. A lower payment might seem like a temptation right now, but you might end up regretting that decision if it affects your ability to qualify for a mortgage or take out a small business loan in the future.
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