There are six main repayment options for Federal education loans, consisting of Standard Repayment and five alternatives. Each of the alternatives has a lower monthly payment than the Standard Repayment plan; however, this extends the term of the loan and increases the total amount of interest repaid over the lifetime of the loan.

Types of Repayment Plans

The repayment plans are as follows:

• Standard Repayment. Under this plan you will pay a fixed monthly amount for a loan term of up to 10 years. Depending on the amount of the loan, the loan term may be shorter than 10 years. There is a $50 minimum monthly payment.
• Extended Repayment. This plan is like standard repayment, but allows a loan term of 12 to 30 years, depending on the total amount borrowed. Stretching out the payments over a longer term reduces the size of each payment, but increases the total amount repaid over the lifetime of the loan.
• Graduated Repayment. Unlike the standard and extended repayment plans, this plan starts off with lower payments, which gradually increase every two years. The loan term is 12 to 30 years, depending on the total amount borrowed. The monthly payment can be no less than 50% and no more than 150% of the monthly payment under the standard repayment plan. The monthly payment must be at least the interest that accrues, and must also be at least $25.
• Income-Contingent Repayment. Payments under the income contingent repayment plan are based on the borrower's income and the total amount of debt. Monthly payments are adjusted each year as the borrower's income changes. The loan term is up to 25 years. At the end of 25 years, any remaining balance on the loan will be discharged. The write-off of the remaining balance at the end of 25 years is taxable under current law. There is a $5 minimum monthly payment. Income Contingent Repayment is available only for Direct Loan borrowers.
• Income-Sensitive Repayment. As an alternative to income contingent repayment, FFELP lenders offer borrowers income-sensitive repayment, which pegs the monthly payments to a percentage of gross monthly income. The loan term is 10 years.
• Income-Based Repayment. The College Cost Reduction and Access Act of 2007 introduced income-based repayment as a more generous alternative to income-sensitive and income-contingent repayment, starting on July 1, 2009. Unlike income-contingent repayment and income-sensitive repayment, it is available in both the Direct Loan and FFELP programs. Income-based repayment is like income contingent repayment, but caps the monthly payments at a lower percentage of a narrower definition of discretionary income. Income-Based Repayment is available only for Direct Loan borrowers. Please click here for additional information.

No Prepayment Penalty

All Federal education loans allow prepayment without penalty. For loans that are not in default, any excess payment is applied first to interest and then to principal. However, if the additional payment is greater than one monthly installment, you must include a note with the payment telling the processor whether you want your prepayment to be treated as a reduction in the principal. Otherwise, the government will treat it as though you paid your next payment(s) early, and will delay your next payment due date as appropriate. (It is best to tell them to treat it as a reduction to principal, since this will reduce the amount of interest you will pay over the lifetime of the loan.)

Due to the way the income contingent repayment plan treats interest, it is not advisable to prepay a loan in the income contingent repayment plan.

Can Switch Repayment Plans

If you want to switch from one plan to another, you can do so once per year, so long as the maximum loan term for the new plan is longer than the amount of time your loans have already been in repayment. (In other words, if you are in year 26 of a 30-year extended repayment plan, you cannot switch to the income contingent repayment plan and have the remaining balance written off.)

Comparing Repayment Plans

The following table compares each of the major repayment plans with standard ten year repayment. As the table illustrates, increasing the loan term reduces the size of the monthly payment but at a cost of substantially increasing the interest paid over the lifetime of the loan. For example, increasing the loan term to 20 years may cut about a third from the monthly payment, but it does so at a cost of more than doubling the interest paid over the lifetime of the loan. This table is based on the unsubsidized Stafford Loan interest rate of 6.8%.

For example, suppose you borrow a total of $20,000 at 6.8% interest. The following table shows the impact of switching from standard 10 year repayment to 20 year extended repayment.

Federal Loan Consolidation

While federal loan consolidation is not a loan repayment option per se, it offers some advantages that you should consider as you seek to determine the best repayment strategy for your particular circumstance. It is one of the easiest ways you'll find to manage all of your federal loans and offers many advantages. By consolidating your student loans, you may:

• Convert variable-rate education loans into a loan with a fixed interest rate for the life of the loan.
• Reduce the number of monthly bills and possibly lower your monthly payments.
• Stretch your repayment period from the standard 10 years, to up to 30 years, depending on the amount of your education debt.  
• Retain federal benefits including  the six repayment options and also postponement options such as deferment and forbearance
• Qualify for loan forgiveness based on your employment in public service 

Even if you have already consolidated while enrolled, you may eligible to consolidate again if you received additional student loans, or if you left loans out of your original consolidation loan.  

You have the ability to choose the lender of your choice to consolidate your loans. However, you may want to consider staying with the lender which you have established relationship with. The marketing targeted at student loan borrowers continues to intensify and borrowers should consider the following:

• Many consolidation marketers are not the lenders.  Ask who will be the actual lender/loan holder and loan provider. Can that change?
• Repayment can be a long-term relationship so, it is good to ask how long have they been in the federal educational loan business.
• Borrower benefits that may look too good to be true often are. Read the fine print.
  

Other Resources:

• FSA:  Loan Consolidation
• FinAid: Loan Repayment
• Postpone Repayment
• Public Service Loan Forgiveness