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Alternative Repayment Plans for Federal Student Loans

Alternative Repayment is available on a case-by-case basis when a borrower has exceptional circumstances and the other available repayment plans do not adequately address the borrower’s situation. The borrower must provide documentation of the exceptional circumstances. Alternative repayment is available only for federal student loans in the Direct Loans program.

The regulations at 34 CFR 685.208(l) specify that the terms of the alternative repayment plan must comply with the following restrictions:

  • A maximum repayment term of 30 years, not counting periods of authorized deferment and forbearance
  • A minimum monthly payment of $5
  • Compliance with the three-times rule, where no payment is more than three times the smallest payment

Generally, federal loan servicers offer four versions of alternative repayment:

  • Alternative Fixed Payment
  • Alternative Fixed Term
  • Alternative Graduated
  • Alternative Negative Amortization

The first two plans are variations on level amortization where the borrower picks a particular monthly payment or repayment term, subject to the regulatory restrictions. The third plan is a variation on the graduated repayment plan.

The first three plans may not be negatively amortized, so the monthly payment must exceed the new interest that accrues. The fourth plan may be negatively amortized, but the negative amortization is limited to one year in total duration.

In practice, the alternative negative amortization plan is similar to income-based repayment (IBR). For example, it includes a provision where accrued but unpaid interest is capitalized (added to the loan balance) until the outstanding principal balance reaches 10 percent more than the original principal balance of the loan when the borrower entered repayment. Interest then continues to accrue, but is not capitalized. Note that payments made under an alternative repayment plan do not count toward the 25-year forgiveness in the income-based repayment plan.

Alternative repayment is often used as a mechanism to provide defaulted Parent PLUS Loan borrowers with an income-based repayment plan, even though they are not normally eligible for Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay-As-You-Earn Repayment (PAYE), or Revised Pay-As-You-Earn Repayment (REPAYE).

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