If in the US, and in his twenties and just out of college, there is more than one thing on that person’s mind.
Among all the other things, one is getting a good paying job and one another definitely will be the repayment of the loan that he has borrowed as a student.
Types of loans:
At the time of applying a loan to complete education, there are two options available to a student.
One is the Federal loan which is provided by the Government of the land and the other is the private loan that is provided by private companies and banking institutions.
Even though statistics show that both the loans are equally preferred by students, there are certain advantages that only the Federal Loan provides.
For example, the repayment option of the federal loan is much more flexible than the private loan and the interest rate on the federal loan is also much lower than the private loan.
Since any loan will entail a serious financial commitment, it is regarded as a major decision. One that determines the student’s standard of living long after he finishes his education. The choice of the loan borrowed for equipping himself with a career is as important as his choice of career itself.
It is extremely important therefore that the borrower studies the loan options available to him and carefully analyses the various options that he has while repaying the loan and then takes an informed decision.
Information on Federal loans can be gleaned from logging on to the Government’s website of the Department of Education of the United States. It is prudent to compare the various repayment options that are available for his loan. He may also gather resource material on the loans from the internet.
Banks and various credit institutions also offer private student loans to students. Information about them can be got from meeting the loan servicing officer or reading about them from their websites. The idea is to be well informed before taking any decision because this is one decision that will have a direct bearing on his life after school.
Standard Repayment Plan on the federal loan:
Industry experts indicate that between the two, a Federal loan is simpler and better than a private loan because there is lot of flexibility in the federal loan at the time of repayment. People who have successfully foreclosed their loans recommend that a standard plan is the best to opt for. The standard plan offers to divide the loan amount into equal monthly installments for a period of ten years.
The plan ensures a minimum rate of interest and a period of ten years is a good time to spread the repayment.
On a Standard Repayment Option, the person has a choice to refinance his loan. Refinancing of loan can do a world of good to him. It can slash the interest rates and help in paying off the loan in a shorter duration.
The standard plan is good for those who are fortunate to secure a good job immediately out of college. It is important that the person should also be making enough money to repay his monthly installments without defaulting for a single consecutive month.
It is well understood that this may not be the case for the majority of the people. If the standard plan looks difficult, then there are other repayment options available for him to choose from.
Income Driven Repayment Plan:
The Income Driven Repayment Plan (IDR) sets the monthly installments at a percentage of his income and simultaneously increases the duration of repayment from ten years to 20 years, even 25 years. Even though the monthly payment is lower as compared to the basic Standard Repayment Plan, the interest that will accrue and will have to be paid in the end will be higher than the standard plan.
IDR is recommended for those people who think that they are not earning enough to be able to repay their loan as well as maintain a decent standard of living.
With IDR, the federal loan allows forgiveness of the balance repayment of loan amount at the expiry of a period of 20 to 25 years for a government employee or a person working for a non-profit organization. The person must have opted for the IDR and also must have paid his loan amount for a period of ten years without defaulting even on a single occasion.
However the person will be liable to pay the interest that may accrue on the forgiven amount of loan.
IDR has to be applied for through the website of the Department of Education. The application has to be routed through a loan servicer. The plan has to be reapplied every year and information has to be updated. Any change of status (for instance single to married), or any addition to the family (birth of a child) can substantially alter the amount due and payable every month.
Any unfortunate delay in re-application of IDR can cost the interest accrued on the loan to be added to the principle amount. It is a good idea to set calendar alarm in the phone so that the date of re-application is not missed. Alternatively, the loan servicer could be specifically instructed to post a reminder of an impending re-application.
Income Based Repayment Plan (IBR):
This repayment option plan may be opted by a person if his loan has been borrowed on a date after the first of July, 2014. The plan is recommended for those especially whose financial commitment apart from the repayment of his loan is too heavy to afford his monthly repayment of the student loan.
This plan works exactly like the IDR but there are certain criteria that have to be met by the borrower in order to qualify for this repayment plan, for example, his monthly income and the size of his family.
Graduated Repayment Plan:
A Graduated Repayment Plan is good for borrowers who cannot afford repayment on the Standard plan. The person opting for this plan must be sure that his income will increase in the subsequent years. The plan is not recommended always although it may work for some. At least it will not involve the hassle of reapplying every single year as is the case with IDR and IBR.
This plan is mostly referred to professionals like doctors and financial advisors who have the prospect of doing extremely well in their career in a short duration of time. The graduated plan gives him a breather for the first two years where he repays his loan at a minimum rate of interest.
Incidentally, this is the also the time when he is working as an apprentice or doing his research and only earning a meager stipend.
Income Contingent Repayment Plan (ICR):
An Income Contingent Repayment Plan is suitable for borrowers of Parent PLUS loans. What this plan does is that it increases the monthly payment rate at 20% of his income and extends the term of repayment to 25 years. It also provides for forgiveness of any payment that is left remaining at the expiry of 25 years.
Parent PLUS Loan Repayment Plan:
Federal loans are also available to the parents of a dependent student. The loan is only for the undergraduate courses and does not include any other postgraduate college courses and specialized training course. The interest on the parent PLUS loan is fixed and it is revised every year on the 1st of July based on the market rate.
The interest for the current year is pegged at 6.15%.this loan however entails an additional fee for processing of this loan.
The federal law provides this repayment option on the belief that it is the duty of the parents to educate their children. However, a lot of people in the know-how think that before a parent PLUS loan is applied, the student must exhaust his student loan option first. This is because there is a lower rate of interest on the Student loans Repayment option.
Application for the loan has to be presented only by the parent who is borrowing. The application can be got from www.FAFSA.ed.gov. For the purpose of this loan, a parent means the biological parent of the student. An adoptive parent is allowed to borrow the loan. The provision does not understand grandmother, grandfather or any guardian in absence of the parents to borrow such loan.
A step parent may borrow the loan only as long as he is married to the real parent of the student. The loan is only for dependent students. The option provides that even the parents who are well settled and can afford their children’s education can apply for this loan. One thing that is most desirable for this loan is the creditworthiness of the parent who is applying for the loan.
There should be no history of adverse credit. However, parents with adverse credit history may be eligible for the loan if there is an endorsement from another person who has good credit history. Thus on the fulfillment of this condition, parent PLUS loans cannot be refused if another person with good financial history co-signs the loan papers.
Smart Option Repayment Plan:
This plan ensures extremely competitive rate of interest on loan. There is no origination and capitation fee at the beginning of the loan and the repayment options are very flexible. The plan entitles the borrower to 100% of school and college expense inclusive of tuition fees, the home and boarding fees, books and miscellaneous expenses.
One of the criteria that are imminent for this loan option is that the person who is applying for the loan must not have any adverse credit ranking. However, if a person with good credit history co signs the loan document, then the option cannot be denied. The Smart Loan Option also provides for the release of the co signer from any liability after the loan is granted.
One of the companies providing private loans is believed to have this kind of smart loan for a very long time. Infact it has been the market leader in providing this repayment option. Sallie Mae is believed to be the pioneer in offering the smart repayment option. This option is any day better than a Parent PLUS options because of the following reasons.
Consolidated Loan Repayment Plan:
If there is more than one student loan that the person is repaying then this repayment option will help in consolidating all his loans as one and fix just one interest rate as a single monthly payment towards discharging the loan.
A word of caution is that the borrower should never ever think of consolidating his federal loans and private loans together. By doing so, he may lose out on all the benefits of the federal loan like unemployment deferment and loan amount forgiven at the far end of the income derived repayment option.
It is a good idea however to consolidate all the various federal loans together as it can save the trouble of remembering different dates of payment due with the rate of interest accruing on each loan.
Best student loan options:
Even though both options are available to the student, a federal loan is always seen as more beneficial from the student’s point of view. Not to say that private loans are bad. Here are the best three companies for private student loan options in case the student does opt for private loan.
College AVE provides for undergraduate, graduate and parent plus loans. They have an option of repayment between 8 and 15 years. Their rate of interest is fixed at 4.99%. The company does not charge any capitation, origination or pre payment fees.
Sallie Mae enjoys a very good reputation among private loan lenders. The professionalism which is portrayed by this company is hardly replicated by anyone else. The company provides for all kinds of education loans including parent plus loan. The rate of interest is slightly on the higher side at 5.74%.
While the company does not charge any costs, it gives back a 2 percent as bonus to the borrower every month if the borrower pays his installment in time.
Citizens Bank has been voted consistently higher by the consumers every year. It lends money for all education courses. The rate of interest is 6.24% and it is fixed. The repayment period is between 5 years and 15 years. Citizens bank also rewards the customer for making in time payment of monthly installment.