Federal Direct Student Loans

The idea of the college loan is that tuition is covered while studying, and most loans only ask for repayment after graduation. For some loans, interest isn't calculated until repayment begins, again often after graduation. Colleges may offer their own loan programs, but the not-so-new federal loan program should also come under consideration when financing education.

The Federal Direct Loan Program began in 1994. In order to stand out from other student loan opportunities, the Federal Direct Loan offers varying payment plans for students. There are problems with each, but there are also perks that may make this the perfect financing choice.

Same Old Same Old

The Direct Loan offers a payment option similar to most loans. After graduation over the course of ten years, students repay the loan and its interest in 120 monthly payments. Students who borrow significantly less may opt for a shorter payback period. Interest is charged only once repayment begins.

Income Contingency

A second option for Direct Loan repayment is the income contingent repayment option. This option is best for students who expect to see their earnings increase as they move through the workforce. For instance, they may be required to start their corporate climb in a low paying starter job. If the opportunity is wide for advancement in pay, this payment option may be ideal.

The payment schedule follows the student up the pay scale, increasing monthly payments over the years. The payments are limited to 20% of the student's discretionary income each month; therefore, as the income rises so do the payments.

The problem with this plan is the student who doesn't see the instant success of his/her career choice. If the corporate climb isn't so fast or students find themselves without jobs in their intended fields, the maximum repayment rate may not cover the accruing interest. In this case, the interest is added to the principal. It's certainly a motivator for success, but it's a detriment for those who find themselves happy at a medium level of income.

However, for those who find themselves behind their career earning goals, after twenty-five years any remaining debt on this type of loan is forgiven. It's not a gift, though. Forgiven debt will be reported as income, and taxes will need to be paid on it. This could start a whole new problem. The easy fix is to guarantee rising income and to consider the option carefully.

Graduated Repayment

Similar to the income contingency repayment option, a third repayment option for graduates is the graduated repayment. This also starts a graduate with low monthly payments and increases them over time, assuming that income has risen. However, instead of calculating a percentage of the income and creating payments at no more than 20% of it, these payments are automatically calculated and adjusted regardless of the student's job or potential. Real pitfalls could arise here as payments could exceed the amount able to be paid each month. The plus? Repayment can extend as long as thirty years.

Other Perks

Other perks that make the direct loan option stand out include prepayment and a non-locking option board. Students who chose the graduated repayment but see failure in the future can change to a standard repayment plan at any time. Prepayment also incurs no penalties with this type of loan. In a time of sudden job loss or a need to change careers before student loans are paid, the Federal Direct Loan Program may offer just the right options needed for today's students.