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How to choose the right student loan repayment plan for you

How to choose the right student loan repayment plan for you
There are several ways of paying your student loan. Choosing what student loan repayment plan is best for you is critical to get out of debt fast.
  • There are several ways of paying your student loan. Choosing what student loan repayment plan is best for you is critical to get out of debt fast.
  • About 69% of graduates in the United States took a $30,000 or higher student loan last year. From them, 36% of them already have $1,000 credit card debt. Understanding debt consolidation and refinancing is a critical step so you can manage your money well.
  • In this article, I will also explain to you why a student loan income-driven repayment plan may be the right option for you if you own more than a year’s income.

The first step to clear your student loan debt is to choose the best student loan repayment plan for your current life situation. There are several options available, and the best option might change over time.

A student loan is probably the first debt-weight that we have to carry on our shoulders. The best way to achieve monetary freedom is by breaking the debt shackles as early as possible, and the only way to do it is by paying off student loans in full. Pay your debt quick, and the freedom will be yours, personally yours.

This post will focus on the repayment options for U.S. federal student loans. The U.S. Department of Education’s federal student loan program is called the William D. Ford Federal Direct Loan Program. Under this program, the U.S. Department of Education is your lender. 

I will start with a brief introduction of the types of federal loans in the U.S., and then move to explain each of the repayment plans available. Understanding the difference between each repayment plan is critical so you can choose the option that best suits your current financial situation.

The topics covered here will not apply to private student loans. Private organizations, such as banks and credit unions, are the ones giving private loans. They are generally more expensive than federal student loans. If you are currently shackled by a private loan, don ́t worry. Scroll right down and check the BONUS TOPIC on private loan refinancing and consolidation.

Types of federal student loans in the U.S.

There are four types of Direct Loans available under the William D. Ford Federal Direct Loan Program:

  • Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. 
  • Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students. Still, eligibility is not based on financial need.
  • Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students. They help pay for education expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required. Borrowers who have an adverse credit history must meet additional requirements to qualify.
  • Direct Consolidation Loans allow you to combine all of your eligible federal student loans into a single loan with a single loan servicer.

Repayment plans define how and when you must pay your debt

The student loan repayment plan will determine the monthly student loan payment amount. It defines how many years it will take to pay back what you borrowed, and how much interest you will pay over the life of your loan. 

It is essential to keep in mind that the longer it takes to pay back your loan, the more interest will accrue. This accumulated interest will increase the overall cost of your loan. That’s why you should always aim to pay your loan as fast as possible.

When you first begin repaying your student loan, you may select a repayment plan. The default option is to choose the Standard Repayment Plan as it is also the one with the lowest interest (we will talk more about it soon). 

Note that you can change repayment plans at any time, for free.

To change your student loan repayment plan, you must contact your loan servicer (more on loan servicers below).

What are the types of student repayment plans?

There are two basic types of student loan repayment plans: traditional and income-driven.

Traditional Repayment Plans

Here the payments are set based on the duration of the repayment and are not linked to your income level. 

As a rule of thumb, you should choose a traditional repayment plan if you expect your annual income to be higher than the total amount you own.

There are three types of traditional repayment plans:

  1. Standard Repayment Plan: fixed payments over 10 years.
  2. Graduated Repayment Plan: graduated payments over 10 years.
  3. Extended Repayment Plan: fixed or graduated payments up to 25 years.

Income-driven Repayment Plans

Here your income is the critical factor rather than the debt amount. Your income will define how your debt repayment will be calculated. 

Income-driven plans can be especially helpful if the size of your loan is more substantial than your annual income. 

There are 4 types of income-driven repayment plans:

  1. REPAYE
  2. PAYE
  3. IBR
  4. ICR

I will go over all the available repayment plans in detail, explaining what loans are eligible for each of them and where consolidated loans can be used. But first, let ́s review two critical topics: loan servicers and loan consolidation.

Loan Servicers: the billing handlers

A loan servicer is a company that handles the billing and other services on your federal student loan on our behalf. The best part of it is that they do that for free, no cost to you. 

Your loan servicer will work with you on repayment options. It will assist you with other tasks related to your U.S. federal student loans. 

It is vital to keep your contact information up to date so your loan servicer can help you stay on track with repaying your loans. In case your circumstances change during your repayment period, your loan servicer will be able to help.

IMPORTANT: Never pay an outside company for help with your federal student loans. Your loan servicer should be able to assist you for free.

Loan Consolidation

Loan consolidation can be done if you have multiple student loans. It enables you to combine multiple federal education loans into one loan with a fixed interest rate based on the average of the interest rates on the loans being consolidated.

Through the completion of the free Federal Direct Consolidation Loan Application, you will confirm the loans that you want to consolidate and agree to repay the new Direct Consolidation Loan. 

Once the consolidation is complete, you will have a single monthly payment instead of multiple monthly payments on the loans you consolidated.

Note: There is no application fee to complete a Direct Consolidation Loan application. You may be contacted by private companies that offer to help you consolidate your loans for a fee. These companies have no affiliation with the U.S. Department of Education (ED) or ED’s Federal Loan Servicers.

Should I consolidate my loans?

Not always. It depends on your personal situation, and the answer might be straight forward. You can read more about the pros and cons of loan consolidation.

Traditional Repayment Plans

Now that you understand the basics of repayment plans, loan servicers, and loan consolidation, let’s dig into the available types of traditional repayment plans.

Standard Repayment Plan – The quick default method

The Standard Repayment Plan is the primary student loan repayment method and also the most popular repayment plan. The popularity is in part because it is the default option for borrowers who have not chosen another repayment plan, and also because all borrowers are eligible for this plan.

This repayment plan saves you money over time because you’ll pay off your loan in the shortest time. On the other hand, your monthly payments may be slightly higher than payments made under different plans. 

Overall, this plan should be your first choice as you will pay the least amount of interest over the life of your loan.

The standard repayment plan is a level payment plan, with up to 120 fixed monthly payments during a repayment term of up to 10 years. Payments are a fixed amount that ensures your loans are paid off within 10 years. In the case of consolidated loans, this period can be increased up to 30 years. 

There is only one shortcoming of the Standard Repayment Plan. SRP is unacceptable for gaining a Public Service Loan Forgiveness (PSLF) service.   

Standard Repayment Plan – Monthly payments for non-consolidated loans

The Standard Repayment plan uses a fixed monthly amount, so your loan is totally paid in 10 years. The minimum monthly payment is set to 50 dollars. 

Standard Repayment Plan – Monthly payments for consolidated loans

If you have a consolidated loan, the minimum monthly payment will continue to be $50. Still, the period will depend on the size of your loan.

If you own less than $7,500, $10,000, $20,000, $40,000 or $60,000, your repayment period will be respectivelly 10, 12, 15, 20, 25, or 30 years.

Standard Repayment Plan – What kind of loans are included?

The included loans are:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • Direct Consolidation Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans

Standard Repayment Plan key takeaways

1) It is the primary loan repayment option to pay back your federal student loans 

2) It is the cheaper option as it offers the lowest total interest 

3) You’ll get the payment tenure of 120 months or 10 years

4) For each month, you’ll have to pay an equal amount

Graduated Repayment Plan: start paying less and build up over time.

You should choose this plan only if your current income is not high enough to afford the Standard Repayment Plan. With the Graduated Repayment Plan, payments are lower at first and then increase over time.

Usually, payments will increase every two years. Therefore this plan makes sense only if your income is low today, but you expect it to increase steadily over time. 

Payments will be set to an amount that will ensure your loans are paid off within 10 years (within 10 to 30 years for Consolidation Loans).

Graduated Repayment Plan – Monthly payments for non-consolidated loans

Payments under the graduated repayment plan start out low and increase every two years. They will last for 10 years in such a way that:

  • The monthly payment will never be less than the amount of interest that accrues between your payments.
  • It won’t be more than three times greater than any other payment.

Graduated Repayment Plan – Monthly payments for consolidated loans

Here the system works similarly to non-consolidated loans.

Consolidated payments under the graduated repayment plan start out low and increase every two years. They will last from 10 to 30 years in such a way that:

  • the monthly payment will never be less than the amount of interest that accrues between your payments
  • and won’t be more than three times greater than any other payment.

If you have a consolidated loan, the period will depend on the size of your loan. If you own less than $7,500, $10,000, $20,000, $40,000 or $60,000, your repayment period will be respectively 10, 12, 15, 20, 25, or 30 years.

Graduated Repayment Plan – What kind of loans are included?

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans
  • Direct Consolidation Loans
  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans

Graduated Repayment Plan key takeaways

  1. The Graduated Repayment Plan is ineligible to get a PSLF or Public Service Loan Forgiveness advantage.
  1. Your monthly payment will be lower at first, then it’ll increase gradually with a gap of 2 years.
  1. Ultimately, the payment plan will force you to pay off more than your Standard Repayment Plan.

Extended Repayment Plan

You may already have guessed it why the word ‘Extended’ is attached to this particular student loan repayment plan. Here you will get a payment extension, which is up to 25 years. 

The good point here is that your monthly payment will be lower than the Standard Repayment Plan and Graduated Repayment Plan. The downside is that you will pay mover over time than with the 10-year plans.

To qualify for the extended repayment plan, you must have more than $30,000 in outstanding direct loans.

The extended Repayment Plan is also not eligible to get a PSLF or Public Service Loan Forgiveness plan. 

Extended Repayment Plan – Monthly Payments

Under this plan, your monthly payments are

  • a fixed or graduated amount,
  • made for up to 25 years, and
  • generally lower than payments made under the Standard and Graduated Repayment Plans.

Extended Repayment Plan – What kind of loans are included?

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Federal Stafford Loans
  • all PLUS loans
  • all Consolidation Loans (Direct or FFEL)

Extended Repayment Plan key takeaways

  1. Payments can be a fixed or graduated amount
  2. It can be extended up to 25 years
  3. Your monthly payments will be lower than under the 10-year Standard Plan or the Graduated Repayment Plan.
  4. You’ll pay more over time than under the 10-year Standard Plan.
  5. Not a qualifying repayment plan for PSLF.

Income-driven Repayment Plans

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Income-driven Repayment Plans

If you own more than a year’s income, then an income-driven repayment plan might be right for you.

An income-driven student loan repayment plan sets the monthly payment proportionally to your income and family size. Therefore you will pay less when your income is low and more whenever you get an increase in pay.

As I mentioned before, there are four types of income-driven repayment plans available:

  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

Income-driven student loan repayment plans usually lower your federal student loan payments. By paying less every month, you will have more money left for your necessary expenses. On the other hand, by making lower payments, you will have to pay for more time. 

Whenever you make lower payments or extend your repayment period, you will likely pay more in interest over time—sometimes significantly more. 

Watch-out: under current Internal Revenue Service rules, you may be required to pay income tax on any amount that’s forgiven. That is what will happen if you still have a remaining balance at the end of your repayment period.

Income-driven Repayment Plans – Monthly Payments

Under an income-driven repayment plan, your monthly payment will be a percentage of your income. The rate is different depending on the program. 

The best practice is to use the Student Aid Repayment Estimator. The Repayment Estimator provides a comparison of estimated monthly payment amounts for all federal student loan repayment plans, including income-driven programs. This comparison is essential because the income-driven plans may not provide you with the lowest payment amount based on your individual circumstances. Your payment may be lower under another repayment plan.

Income-driven Repayment Plans – Repayment duration

Income-driven repayment plans have different repayment periods.

REPAYE Plan

  • 20 years if all the loans you’re repaying under the plan were received for undergraduate study
  • 25 years if any loans you’re repaying under the plan were secured for graduate or professional study

PAYE Plan

  • 20 years

IBR Plan

  • 20 years if you’re a new borrower on or after July 1, 2014
  • 25 years if you’re not a new borrower on or after July 1, 2014

ICR Plan

  • 25 years

Income-driven Repayment Plans – Loan Forgiveness

Under all four plans, any remaining loan balance is forgiven if your federal student loans aren’t fully repaid at the end of the repayment period. 

For any income-driven student loan repayment plan, periods of economic hardship deferment will count toward your total repayment period. The same will happen for periods when your required payment is zero.

Whether you will have a balance left to be forgiven at the end of your repayment period depends on several factors. Mainly it will depend on how quickly your income rises and how significant your income is relative to your debt. 

Your loan servicer will track your qualifying monthly payments and years of repayment. They will notify you when you are getting close to the point when you would qualify for forgiveness of any remaining loan balance.

If you’re making payments under an income-driven repayment plan, you may qualify for forgiveness after you’ve made 10 years of qualifying payments instead of 20 or 25 years. Qualifying payments for the PSLF Program include payments made under any of the income-driven repayment plans.

Income-driven Repayment Plans – What kind of loans are included?

The chart below shows the types of federal student loans that you can repay under each of the income-driven repayment plans.

TABLE

*If you consolidate a loan into a Direct Consolidation Loan, you can then repay the consolidation loan under the income-driven plan. Note that consolidation is not the right choice for all borrowers or all loan types. In particular, you may lose certain loan benefits if you consolidate a Federal Perkins Loan.

Only federal student loans can be repaid under the income-driven plans. Private student loans are not eligible.

Income-driven Repayment Plans – Who is eligible?

Each plan has a set of eligibility requirements that you must satisfy to qualify for the program.

REPAYE Plan

Any borrower with eligible federal student loans can make payments under this plan.

PAYE and IBR Plans

To qualify for PAYE and IBR Plans, the payment you would be required to make must be less than what you would pay under the Standard Repayment Plan with a 10-year repayment period. In other words, you only qualify if you can benefit from it.

Generally speaking, you will meet this requirement if your loan represents a significant portion of your annual income.

In addition to meeting the requirements described above, to qualify for the PAYE Plan, you must also be a new borrower (loan received after 2011)

Income-Driven Repayment plans summary

That’s a lot of information on income-driven repayment plans! 

So here is a quick cheat sheet so you can check the critical differences between them:

TABLE

Income Sensitive Repayment Plan

There is one last type of student loan repayment plan. Initially, I was not going to cover it in this post as it is not applicable for Direct Loans. But then I thought that maybe you also have an FFEL or Stafford Loans, so I decided to include a brief description of it. 

With the Income Sensitive Repayment plan, your monthly payment is based on your annual income. Here your loan will be paid in full within 15 years. The problem with this repayment plan is that you will pay more over time than under the 10-year Standard Plan. 

Finally, the formula for determining the monthly payment amount can vary from lender to lender – making it even harder to access. The best option to assess the income-sensitive repayment plan is to discuss it directly with your loan servicer.

Income Sensitive Repayment Plan – Monthly Payments

Under this plan, your monthly payments

  • increase or decrease based on your annual income and
  • are made for a maximum period of 15 years. 

Income Sensitive Repayment Plan – What kind of loans are included?

  • Subsidized and Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans
  • Not eligible for PSLF.
  • Not eligible for William D. Ford Federal Direct Loans

Bonus TOPIC: Refinancing a private student loan

Don’t be sad if you’ve opted for private student debt. There is always a way to become debt-free.

Are you thinking about what are the ways for paying off private student loans in full? You may opt for refinancing your private student debt. 

What does refinancing mean? 

You’re taking out a new loan to pay off your previous student loan. 

What is the positive aspect of loan refinancing? 

You need to take out a loan at a lower interest rate than your earlier loan. Hence, you can save money on interest payments every month. But you have to obey some requirements to get a chance of refinancing your private student loan. 

What is required to qualify for a loan refinancing? 

First of all, you have to convince your new lender that you have a good job and you’re receiving a decent salary as well. 

The second point is, the new lender will check your credit profile. If the company thinks it is okay, you will get a ‘green light’ that they are going to offer you the private student loan refinancing option. 

If you’re having some problems with your credit score, still it is okay. Private student loan firms have kept a place for co-signers too. A co-signer will cover your not so good credit score, and you can refinance your private student loan.  

Do you have a private student loan along with credit card debt?

Consolidate your credit card debts if you are slowly running over it You can also consolidate your private student loan along with your credit card debt if any. You can opt for an option if you are burdened with credit card debt. It is debt consolidation. 

There are 3 ways to reduce your credit burden: debt consolidation program, balance transfer method, and debt consolidation loan. You may opt for one of these 3 methods to repay your credit card balance in parallel with your student debt repayment. 

We generally take out a student loan to bear the expenses during our graduation time. But, you have to manage it properly. It is not at all bad if you start learning how to make a budget in the early period of your career.   

Also, try finding ways, as fast as you can, to break the shackles of debt and achieve monetary freedom.

BONUS TIP: You can use the Federal Student Aid Repayment Estimator to get an early look at what repayment plans you may be eligible for. You can also use it to receive a comparison of estimated monthly payment amounts for all federal student loan repayment plans. 


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About the author:

This article was written in collaboration with Linda Richardson. Linda is a New Jersey-based financial content writer and enduring learner, with an ongoing interest to learn new things. She uses her curiosity, connected with her knowledge as a financial writer, to write about subjects valuable to small businesses. You can follow her on Facebook and Twitter.

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Written by Leblon Blue

Career manager with engineering background. Finance enthusiast. Recently started this blog. Enjoying financial freedom.

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