If you're borrowing to help pay for college, exhaust all your federal student loan options first, many experts recommend. Going with a government option means you'll have a fixed interest rate and borrower protections, including the ability to defer payments if you wind up in economic trouble after graduation.
[Learn more about the benefits of federal loans.]
Taking certain federal student loans (excluding Parent PLUS loans and Perkins loans that have not been consolidated) also means borrowers can opt into more flexible repayment plans, if their financial circumstances qualify. In addition to standard repayment, which takes up to 10 years to pay off, and extended repayment, which takes 12 to 25 years to repay, some options for eligible borrowers earning low wages include:
• Income-Based Repayment: IBR may be a good option for borrowers who can demonstrate "partial financial hardship" and understand that they'll be making lower payments for a longer period of time.
As the name suggests, IBR takes a borrower's discretionary income into account when calculating monthly payments to help ensure student loan bills are manageable. You may qualify if your total amount due on your loans each year under the standard repayment plan is more than 15 percent of your discretionary income, a calculation that includes your adjusted gross income, the poverty line, and family size.
Enrolling in an IBR plan means you'll be paying off your student loans for up to 25 years. Taking a longer time to pay down your debt will ultimately cost you more in interest than if you stuck to the standard 10-year plan. After making on-time, qualifying payments for 25 years, any outstanding loan balances are canceled.
[Read about student loan changes for 2012.]
• Income-Contingent Repayment: ICR has been around much longer than IBR and is open to borrowers with direct loans. ICR examines income (including a spouse's income, if applicable), family size, and the total amount of your direct loan. Borrowers do not need to demonstrate partial financial hardship to qualify, and monthly payments will be adjusted on an annual basis if your circumstances change.
Like IBR, ICR allows borrowers to make lower payments for a longer period of time, thus increasing the total amount paid. However, also like IBR, loan balances are forgiven after 25 years of qualifying payments under an ICR plan.
Both IBR and ICR can make certain borrowers eligible for Public Service Loan Forgiveness (PSLF). After making 120 full, on-time payments, borrowers who work in the public sector for a decade will have their remaining loan burden erased if they have eligible loans and have been making at least some payments under plans including IBR, ICR, or the 10-year standard repayment plan.
Banking on using PSLF, however, means students must be prepared for a decade-long commitment to public interest work. If you leave the government or nonprofit sector before making 120 payments—no matter how close to that mark you are—you will be ineligible for the loan forgiveness.
IBR and ICR are not the only flexible repayment plans offered to federal borrowers with eligible student loans. If you're feeling daunted by your options, there are a variety of online tools to help map out your choices, including calculators provided by the Department of Education and by private sites such as FinAid.org and PayBackSmarter.com. Plus, your financial aid officers and loan servicer may be able to answer questions specific to your financial situation. Don't be afraid to ask—it could save you from ultimately paying more than necessary for your student loans.
Trying to fund your education? Get tips, news, and more in the U.S. News Paying for College center.