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Which Student Loan Repayment Plan is Best for You?

by Jesse Campbell on
10/6/2023
in Managing Student Loans
Young professional woman.

Student loans have become an essential part of pursuing higher education for millions of students worldwide. While they offer financial assistance, repaying these loans is never easy. Fortunately, there are various federal student loan repayment plans available to ease the burden. In this article, we'll explore the different types of student loan repayment plans and help you determine which one might be the best fit for your financial situation.

Available Federal Student Loan Repayment Plans

Standard Repayment Plan

The standard repayment plan is the most common option for federal student loans (it’s literally the standard). You make fixed monthly payments over a ten-year period, at which point the loan is paid in full.

Pros: You'll pay off your loans in just ten years, which is a heartbeat compared to some of the other plans. You'll pay less interest over time compared to longer-term plans.

Cons: Monthly payments are higher than other plans, which may be challenging for some borrowers. If you don’t feel confident in your earning ability after graduation, you may want to consider a different plan.

Graduated Repayment Plan

The graduated repayment plan starts with lower monthly payments that increase every two years over a ten year period. The payments near the end of the term may be dramatically higher than the payments at the beginning.

Pros: This is great if you expect your income to rise steadily over time. The lower payments at the beginning will be more manageable, and you’ll still be out of debt after ten years.

Cons: You'll pay more interest over the life of the loan compared to the standard plan and those later payments may strain your budget if your income hasn’t increased enough to support the higher payments.

Income-Driven Repayment Plans

There are a variety of different income-driven repayment plans, but the common feature is that your payments aren’t based on your loan amount, but rather on your income.

Income-Based Repayment (IBR)

IBR plans cap monthly payments at 10-15% of your discretionary income. These plans are ideal for borrowers with low income relative to their debt. After 20 to 25 years of payments, any remaining balance is forgiven.

Pros: Payments are based on what you can afford (and never more than what you would pay on a standard payment plan), and any remaining balance may be forgiven after 20-25 years of qualifying payments. Payments are calculated every year, so you won’t be stuck with an unaffordable payment if your income changes.

Cons: You may pay more interest over time as compared to a standard payment plan, and forgiven amounts may be considered taxable income.

Pay As You Earn (PAYE)

PAYE plans are similar to IBR plans with monthly payments capped at 10% of your discretionary income and the remainder of your debt forgiven after 20 years of consistent payments.

Pros: Offers one of the lowest possible monthly payments.

Cons: Your debt needs to be high compared to your income in order to qualify. This payment plan will cost you quite a bit more over time when compared to the standard plan.

Saving on a Valuable Education (SAVE) Plan

Formerly known as the REPAYE plan, SAVE plans are open to all direct loan borrowers with an eligible loan type and cap payments at 10% of your discretionary income. They also offer loan forgiveness after 20 years (for undergraduate study loans) or 25 years (for graduate or professional study loans).

Income-Contingent Repayment Plan (ICR)

Similar to many of the other income-driven plans, in an ICR plan your monthly payment is either 20% of your discretionary income or the amount you would pay on a fixed payment plan over 12 years, whichever is lower. Any unpaid balance is forgiven after 25 years. You’ll pay more than what you would on a standard plan, but less when compared to some of the others making it a good option if the standard plan is outside of your budget.

Income-Sensitive Repayment Plan

Only available for Federal Family Education Loan (FFEL) Program loans. The monthly payment is based on your annual income, but the loan must be paid in full within 15 years.

Extended Repayment Plans

Extended repayment plans allow borrowers to extend their repayment term to 25 years, resulting in lower monthly payments but higher overall interest costs. You need to have more than $30,000 in Direct Loan debt to qualify.

Pros: Lower monthly payments thanks to the longer payoff period.

Cons: Much more costly over time than a standard plan. No forgiveness opportunities.

Choosing the Best Repayment Plan for You

With several repayment options available, it's essential to choose the one that aligns with your financial circumstances. Here are some questions to ask yourself:

What's your financial situation?

Weigh your current income, expenses, and financial goals. If you have a stable income, the standard plan might be suitable. If your income is low, consider income-driven plans.

How much do you owe?

The amount of student loan debt you have plays a significant role in choosing a plan. High debt may necessitate income-driven plans to keep monthly payments manageable.

What are your career goals?

Consider your career prospects and earning potential. If you anticipate a steady income increase, a graduated plan might work well.

How big is your family?

Some income-driven plans take into account the size of your family. If you have dependents, this can affect the percentage of your discretionary income used for loan payments.

Are you eligible for loan forgiveness?

Don't miss out on an opportunity to have a portion of your student debt forgiven. Some income-driven plans offer forgiveness after a set number of years, which can be advantageous for long-term financial planning.

Common Questions about Student Loan Payment Plans

Can I change my repayment plan?

Yes, you can change your repayment plan at any time to better suit your financial circumstances.

What happens if I miss a student loan payment?

Missing a student loan payment can lead to late fees and a negative impact on your credit score. Depending on your payment plan, you may jeopardize your ability to have a portion of the debt forgiven at the end of the assigned payment period. It's essential to contact your loan servicer if you're having trouble making payments to explore options like deferment or forbearance.

Is there a maximum income limit for income-driven repayment plans?

Income-driven plans have income caps, and your eligibility is determined based on your income and family size. If you file your taxes jointly with a spouse their income may be included when calculating your eligibility and monthly payment. Be sure to check the specific requirements for each plan to see if you qualify.

Selecting the right student loan repayment plan is crucial for managing your debt effectively. Take the time to assess your financial situation, loan amount, and career goals. By doing so, you can choose a repayment plan that aligns with your needs and sets you on the path to financial success.

Need help finding the best plan for you? MMI offers student loan counseling just for that purpose. We can help you understand your options and pick the plan that best meets your needs.

Tagged in Debt strategies, Advice for students

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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