Repayment Plans for Consolidated Student Loans: Federal Student Loan Consolidation’s Four Repayment Options

Those looking to bundle multiple federal student loans into a single loan do so for many reasons. For some, it’s the organizational convenience of making one monthly payment which makes consolidation attractive. Others seek federal student loan consolidation to lower their monthly payments and reduce their short-term debt after financial hardships brought them close to defaulting.

Regardless of the reason, those considering federally-backed Direct Consolidation Loans have four repayment options from which to choose. This article will explain these repayment plans and describe the benefits of each.

Federal Student Loan Consolidation – Two Basic Repayment Plans

For borrowers of federal student loans, two basic repayment plans exist:

  • Standard Repayment Plan – borrowers pay a fixed monthly amount which must be at least $50. Depending on one’s total indebtedness, the consolidated loan must be payed back to the Department of Education within 10 to 30 years. (The guidelines for when a loan must be repaid are found at the end of this section.) One benefit of a Standard Repayment Plan is that, over time, borrowers may end up paying less in interest than with a Graduated Repayment Plan.
  • Graduated Repayment Plan – borrowers’ minimum payments with this plan must be at least as much as the monthly amount of interest accrued. Often, payments begin very low. However, they increase every two years during the life of the repayment. Due to the low initial monthly payments, borrowers normally will pay more overall with this loan than with a Standard Repayment Plan. Despite this, it may be ideal for low income earners who anticipate better earnings in the future. As with a Standard Repayment Plan, borrowers on this plan must repay the loan within 10 to 30 years, depending on one’s indebtedness.

For both of the above plans, repayment of the consolidated federal student loan depends on the amount of indebtedness a borrower has. Below are the repayment time requirements:

  • For those whose indebtedness is less than $7,500, the consolidated loan must be repaid within 10 years;
  • For those whose indebtedness is between $7,500 and $9,999, the loan must be repaid within 12 years;
  • For those whose indebtedness is between $10,000 and $19,999, the loan must be repaid within 15 years;
  • For those whose indebtedness is between $20,000 and $39,999, the loan must be repaid within 20 years;
  • For those whose indebtedness is between $40,000 and $59,999, the loan must be repaid within 25 years;
  • For those whose indebtedness is $60,000 or more, the loan must be repaid within 30 years.

These two plans offer simple, long-term repayment options for consolidated loan holders. The next section will detail two additional plans which have more complex applications.

Federal Student Loan Consolidation – Two Complex Repayment Plans

The following two plans offer additional repayment choices for consolidated federal student loan holders:

  • Extended Repayment Plan – borrowers can only qualify for this repayment option if their total indebtedness exceeds $30,000. If such is the case, borrowers have up to 25 years to repay the consolidated loan, and may choose either a Standard Repayment Plan or Graduated Repayment Plan to do so.
  • Income Contingent Repayment Plan – this plan provides flexible options for borrowers so as not to jeopardize their financial solvency or the solvency of their family. The amount of a borrower’s monthly payments is determined by measuring one’s Adjusted Gross Income, family size and remaining loan balance. To qualify for this plan, borrowers must be willing to disclose their personal tax information (and if married, information for one’s spouse as well). According to Federal Student Aid, “Monthly payment amounts for some borrowers may not be enough to cover the interest accruing on their loans. This situation is referred to as negative amortization. In such cases, the unpaid interest is capitalized and added to the principal balance once per year. The amount added to the principal balance will never exceed 10 percent of the original Direct Consolidation Loan amount. Once this capitalization limit has been reached, interest continues to accrue but is not capitalized. The capitalization limit does not apply to interest that accrues during deferment or forbearance.” It should be noted that often times, because repayment amounts are small, loans are not repaid within 25 years. In such cases, the remaining balance of the consolidated loan can be forgiven.

Borrowers with a consolidated federal student loan considering each of the four repayment options must balance near-term financial needs with long-term financial obligations. However, immediate financial needs will often dictate which plan works best.

Federal Student Loan Consolidation – Changing Repayment Plans

It is possible for borrowers to switch repayment plans for their consolidated federal student loans, and there is no limit to the amount of times a borrower may switch. However, those who have chosen an Income Contingent Repayment Plan must make at least three payments before changing options.