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How to Make a Debt Repayment Plan

Whether you need to pay off credit card debt, federal student loans or back taxes, a debt repayment plan may be your best option.

Find the right debt repayment plan

The term “debt repayment plan” can refer to a few different things. In the simplest terms, it can refer to a personal pay off plan that you set up to eliminate debt. More formally, you can enroll in debt repayment plans to pay off specific types of debt in the most efficient way possible. The goal is usually to find the fastest way to get out of debt with the lowest interest charges. This helps you avoid things like bankruptcy and save your credit score from damage.

Different plans for different debts

In general, repayment plans can apply to any debt you owe that doesn’t involve collateral – i.e. unsecured debt. Depending on the types of debt you need to pay off, you may need several repayment plans, each one handling a specific type of debt.

  • Credit card debt: This is the one type of debt where you can make a debt repayment plan on your own; we tell you how below. There is also an assisted plan called a debt management program; you go through a credit counseling agency for that.
  • Federal student loans: There are a range of federal student loan repayment plans that you can use to accomplish different goals. Some help you pay off debt quickly to minimize interest charges; others offer low monthly payments to fit your budget.
  • Tax debt: If you owe back taxes, you can set up an Installment Agreement (IA) to pay it back. The plan can include one year of taxes or multiple years.

Each type of repayment plan is described in more detail below.

Credit card debt repayment plans

How to make a debt repayment plan for credit card debt

When you have high interest rate credit card debt to pay off, this should be the first thing you try. You basically want to organize your debts, work with your creditors to find the most efficient way to reach zero on each balance, then prioritize them for payoff. It’s also known as a debt reduction plan.

  1. First you need to know where you stand. Write down each debt you owe: the creditor, APR, and current balance.
  2. Then, you call each of your creditors to negotiate. Here, you have two main goals:
    1. Lower or eliminate the interest rate (APR) applied to your debt
    2. See if the creditor will agree to an adjusted repayment schedule that fits your budget
  3. Once you talk to each creditor, you prioritize your debts for repayment. You follow any repayment plans your creditors agreed to first. Then you pay off the other debts for the creditors who wouldn’t negotiate. You generally want to pay off your highest APR debts first, since they cost more money each billing cycle.
  4. Unless creditors agree to forbearance where they pause your payments without penalties, you will need to keep up with the minimum payments while you focus any extra cash towards eliminating each debt.

Results with creditor negotiation can vary. Your success depends on a few factors. If you’ve been a longtime loyal customer who always pays your bills on time, negotiation is more effective. You may also have success if your credit score has improved since you opened the account. If you’ve already missed payments, habitually pay late or you reached your credit limit, negotiation is often tougher.

If a creditor agrees to an adjusted repayment schedule, you may have to agree to freeze your account. This means you can’t make any new charges until you complete the plan.

Recognizing when it’s time to call in the professionals

When you can’t get your creditors to work with you, professional help can make all the difference in the world. A debt management program is a repayment that you set up through a credit counseling agency. By voluntarily seeking out a credit counseling service to work with them, it shows creditors that you’re serious about paying what you owe.

In this situation, a certified credit counselor helps you find one consolidated payment that will fit your budget. Then they call each of your creditors to negotiate. It’s basically the exact same thing you do yourself. The difference is that these agencies have established relationships with creditors and proven records of helping other people get out of debt. So, even when a creditor won’t work with you, they often sign off on your enrollment in a DMP.

Federal student loan repayment plans

When it comes to student loans, repayment plans generally only apply to federal student loans. If you need to find a better way to pay off private loans, the lender usually directs you into refinancing or debt consolidation.

For federal loans, there are basically seven different plans you can use:

  1. Two of them help you pay off your debt quickly to minimize total interest charges:
    1. Standard
    2. Graduated
  2. The other five are hardship-based programs that focus on lowering your monthly payments:
    1. Income based
    2. Income contingent
    3. Income sensitive
    4. Pay as you earn
    5. Revised pay as you earn

If you don’t choose a plan, federal loan servicers enroll you in a standard plan automatically. With hardship programs, you must certify your income and family size to qualify and recertify each year. These plans extend the term of repayment to 20 years or more.

There is one more option that tries to split the difference between lower interest charges and lower payments. It’s called an extended repayment plan. This can be used to extend the term on a standard or graduated plan from 10 years to 25. It can lower your payments without the hassle of income certification. However, the payments will not be as low as what you can achieve with hardship programs.

Tax Debt

An IRS tax repayment plan is known as an Installment Agreement (IA for short). You and the IRS agree to a repayment schedule for one or more years of back taxes. You can set up these plan yourself through the IRS website. However, if you owe more than $10,000 or your tax debt is complicated, you may be better off hiring a tax resolution specialist.

Consolidation vs. Repayment

If you’ve started researching options for debt relief, you may have already come across the term “debt consolidation.” This is where you combine multiple debts into a single monthly payment. It sounds very similar to debt repayment plans, which often also allow you to pay off what you owe with one payment.

The difference is usually who you owe the debt to once the plan starts. With consolidation, you usually owe a new creditor or lender. For instance, you use a debt consolidation loan to pay off your credit cards. You no longer owe your creditors; instead, you owe the lender.

By contrast, you usually still owe your original creditors when you enroll in a repayment plan. For example, on a debt management program, you still owe your creditors even though you enroll through a credit counseling agency. You make the payment to the agency, but they distribute the money amongst your creditors on your behalf; the agency is just a go-between.

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Article last modified on November 21, 2017. Published by Debt.com, LLC . Mobile users may also access the AMP Version: How to Make a Debt Repayment Plan - AMP.