Avoid the Extended Repayment Plan Student Loan Trap

April 26, 2013

If you’re shelling out a significant amount each month to pay on your student loans, you may be wishing there was a better way – a more affordable option for you. The good news is that there likely is a great way for you to pay less than you are now. The bad news is that if you’ve opted for an extended repayment plan, that’s not the great plan we’re talking about. You have to think about your total financial future and not just right now.

In fact, the extended repayment plan can be the worst thing for you. How is that possible, you wonder? A lower monthly payment that the extended plan offers has got to be a great thing, right? In the short run maybe, but in the long term definitely not and here’s three reasons why:

#1 Will Cost You a Lot More In Interest

If you have a Stafford Loan at 6.8%, jumping into an extended repayment plan will cost you $35,000 in additional interest compared to a standard plan. It was also have you paying on your student loans for 25 years versus the 10 with the standard plan. If you are looking for a lower monthly payment though, you have to think not just how much you can afford to pay per month, but also what this will mean for your long-term financial picture.

The income based repayment plan is a much better option if you qualify. You’ll pay much less in interest under an IBR. Income contingent repayment (ICR) plans are open to a wider array of borrowers than IBR, but will have you paying more than double what you would under graduated repayment and almost three times what you would under the standard plan. The graduated plan will also allow you the flexibility of paying over a longer period with less of an interest hit. So the order of preference would be: IBR, graduated and then ICR (if you can’t afford the standard plan).

#2 May Not Be the Lowest Payment You Can Get

If you’re crunched for cash, you may be scrambling for the lowest possible monthly payment to avoid falling behind in your loan payments. An extended plan may be presented to you with the selling point of it being the longest repayment term you can get. With the longest term, you may assume your monthly payment will be at its lowest, but that’s just not true.

Income based repayment, for those that qualify, will generally always give you the lowest monthly payment. In order to further minimize your payment amount under IBR, if you’re married, filing under the “married filing separate” status will exclude your spouse’s income from consideration. Under IBR, you can get payments as low as $10 with the loan scenario in the chart, assuming a family size of four and $35,000 in income filing separate taxes from the spouse.

#3 Can Preclude Forgiveness                                 

For many of the forgiveness programs, including Public Service Loan Forgiveness, you have to pay a certain number of “qualifying payments.” The quantity of these will vary by forgiveness plan, but a qualifying payment is one made under a standard, graduated, IBR or ICR plan – NOT an extended repayment plan!

Opting for an extended repayment plan will preclude you from any of the forgiveness plans the government currently offers. You may think that your loans will be long paid off before you hit the forgiveness milestone, but you never know what will happen in the future. Losing your job, becoming disabled or other life changing circumstances such as starting and failing in a small business may change your plans, so why not play it safe just in case and pursue IBR in favor of other plans?

If you are considering other repayment plans, Tuition.io’s free student loan management tool can help. You can view your loans in one easy-to-use interface, explore repayment options including IBR, view your balances owed and contact your lenders.

Also enjoy some of our other blogs on student loan repayment options and loan forgiveness:

Obama Proposes Tax Free Student Loan Forgiveness

3 Missteps That Could Cancel Your Public Service Student Loan Forgiveness

4 Downsides to Student Loan Consolidation

Cherry Picking Student Loan Payments – How to Save Big and Pay Down Your Loans Faster

4 Student Loan Repayment Reform Models to Consider