The Direct Loan Standard Repayment Plan Explained

A federal direct loan helps cover the cost of undergraduate or graduate tuition. The cheapest direct loans go to the neediest students, but even higher income students will qualify at times. These loans come with four repayment options: standard, extended, graduated and income based. The standard repayment plan is the most familiar option for most students, but it is not always the most beneficial.

Standard Repayment Plan Explained

Standard repayment simply means you pay back a given amount each month at a given interest rate. This amount will not vary over the life of the loan. You will know the monthly payment up front, and you will also know the interest rate charged. Standard repayment is the most familiar option because it mirrors the payment options used for most installment loans such as auto loans and mortgage loans.

Standard Repayment Plan Advantages

With a standard plan, you are electing an overall lower cost of financing than with other options. Students who calculate the total costs of each of the repayment options will likely find this is the cheapest way to go. The savings come from the very predictable schedule for the lender. For their part, the lender has to do nothing except originate the loan quote then sit back and take in the payments. Standard repayment plans are also the easiest options to understand and calculate up front. With some of the other options, it will be a challenge to determine exactly when a loan will be paid off or the total cost of financing. The standard plan has an exact pay off date and a determined cost from the get go.

Standard Repayment Plan Disadvantages

In return for this predictability and low cost, you will lose a lot of flexibility with a standard repayment plan. First, you will likely owe payments within 60 days of graduation, whether you have a job or not. In fact, unsubsidized direct loans may have payments while you are still attending school. In addition to immediate repayment, you will not be able to adjust your monthly payments in response to a change in ability to pay. To do so, you would have to totally refinance the loan. You should note: all federal student loans offer you the ability to prepay the loan without penalty. The refinancing, then, would only be required if you needed an extension on the loan.

Standard Repayment Plan Alternatives

The extended repayment plan is the most similar to a standard plan, except it is much longer. Lower monthly payments are offered in exchange for higher interest rates. Instead of opting for this choice, graduated repayment may be a better option. It allows you to pay lower sums in the beginning and then higher sums down the line as your salary increases. Of course, there is no guarantee your salary will increase as expected, and the higher monthly payments could become a burden down the line. Income based options solve this problem by assuming a portion of your income each month. If your salary goes up, your payments go up, and visa versa.

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