Loan consolidation, as you might know, is simply a refinancing option whereby most of your loans are packaged as a single large loan with newer terms. As a result, you have a fixed single monthly payment and the likelihood of significantly reducing the interest rates.
But consolidation is not the end of the line for reducing your interest costs. The Extended Repayment Plan is another way of reducing your monthly loan payments and can reduce the total interest rates by almost $1,000!
Understanding the Extended Repayment Plan
Think of the ERP as new and government-backed plan for your payments. It is similar to the standard repayment plan albeit allowing a repayment period of up to 25 years, whereas for standard repayment plan it is 10 years. Since the eligibility of an ERP does not depend on your debt nor income, it is most effective if you have low debt and high income yet need to reduce your monthly repayments.
By using the ERP, your monthly repayments will significantly reduce even, especially when compared to the standard plan, and for the initial few years it may even be as low as interest-only!
Eligibility, Constraints, and Implications
To become eligible for the ERP you must have:
- A total outstanding balance of over $ 30,000 in eligible student loans. These include federal loans such as Stafford (subsidized as well as unsubsidized), PLUS (Parent and Graduate) and Federal Consolidation Loans.
- At least one loan through the Federal Family Education Loan Program (FFELP).
- Obtained a federal consolidation loan on or after October 7, 1998.
However, it is limited to by certain constraints. These include:
- Ineligibility for a Publish Service Loan Forgiveness (that allows you to follow a government select career and have much of your debt forgiven after a certain period).
- The FFELP should have been disbursed not earlier than October 7th 1998.
Here is the tricky part about using the ERP—the prerequisite of consolidating your different student loans very carefully. A consolidated loan which includes private loans and certain other loans will most likely cause you to become ineligible for the ERP as well as increase your interest rates!
[See our guide on Student Loan Consolidation for conditions of eligibility, eligible loans, and tips on keeping certain loans separate]
What if you have planned to stabilize yourself before meeting the loans head on, or what if you are not confident about lucrative job prospects under current economic circumstances? For that you may turn to a Graduated Repayment Plan.
Graduated Repayment Plan
A Graduated Repayment Plan (GRP) is repayment option where your monthly payments are not fixed yet the timeline is 10-years. You can start off with paying just the interest on the loan for up to 4 years! However, this will cause steeper up hills into the future. The basic idea behind the GPR is that you will be becoming more financially stable with time. Hence, the monthly payments will start to increase after every 2 years so as to meet the 10-year timeline. Furthermore, you overall interest will also increase.
A GRP is great for graduates who have confidence in their ability to build a sound career over this time period.
Choose your repayment options carefully, seek professional aid when in confusion, and feel free to get in touch with us for further assistance!
Sources:
http://www.finaid.org/loans/RepayingStudentLoans.pdf
http://studentaid.ed.gov/repay-loans/understand/plans
https://www.alltuition.com/library/student-loan-repayment/lower-monthly-payments/extended-repayment/
