If you qualify for the graduated plan offered under the federal Direct Loan Program, your payments start at as little as half of what they would be under the standard plan, and then increase every few years. Other lenders’ plans vary. Some require that you pay only the interest on your loans for a few years. Then you switch to payments of principal and interest until your loan is paid off. With any graduated repayment plan, you’ll pay more for your loan over time than you would under a standard plan. Because interest charges are based on your unpaid balance each month, if you keep a higher balance in the early years of your loan, interest will add up quickly.

 

Extended Repayment Plan

 

Under an extended repayment plan, your payback term stretches over a period of 12 to 30 years, depending on your loan amount. Your fixed monthly payment is lower than it  would be under the standard plan, but you’ll pay more interest because the repayment period is longer. Most lenders let you combine the extended plan with graduated payments, which will lower your payments even further and increase your overall costs even more.

 

Income Contingent or Income Sensitive Repayment Plan

 

Under an income contingent or income sensitive repayment plan, each year your monthly payments are recalculated based on your prior year’s annual income, household income and loan amount. The amount you pay annually will never exceed 20% of your discretionary income, that is, your annual gross income less an amount based on the poverty level for your household, as determined by the Department of Health and Human Services. To qualify for an income contingent plan, you must authorize the IRS to release your income information to the Department of Education.

 

If your income is very low, you may not be required to pay anything under an income contingent or income sensitive plan, or the amount you pay each month may be less than the amount of interest that is accumulating. This may feel like a relief, but be aware that as time goes on, your loan balance will continue to increase, and eventually it may seem as if you’ll never get out from under.

 

If you’re paying under a federal direct income contingent plan, the government will forgive any balance remaining on your loans after 25 years. Private lenders’ income sensitive repayment plans contain no provision for loan forgiveness after 25 years.

 

Loan Consolidation

 

With loan consolidation, you can lower your monthly payments by combining several loans into one packaged loan and extending your repayment period. Most consolidation lenders won’t accept your application unless you have an outstanding balance of at least $7,500 on your eligible loans. As with other low payment options, consolidating your loans will greatly increase the amount of interest you pay over the life of your loan. You may also be able to refinance several loans, or just one loan, to secure a lower interest rate. This is also called consolidation.

 

Many different lenders offer consolidation loans. Your repayment options will vary slightly depending on the lender you choose. For example, to consolidate under the federal Direct Loan Program (a very favorable program), you must either:

 

  • have a federal direct student loan; or
  • have tried and failed to obtain a consolidation loan with terms as good as those offered by the government.

All consolidation lenders allow you to stretch the term of your loan to anywhere from 12 to 30 years, depending on your balance. You can choose a fixed monthly payment for the life of the loan or a graduated payment plan.

 

If lengthening the repayment period doesn’t bring down your monthly payment enough, you can choose a payment plan based on your income level. Income contingent and income sensitive plans are available for most consolidation loans.