There are nearly 45 million student loan borrowers, and for those with a federal student loan, you need to know about each of the student loan repayment options before picking the best plan for you. There are traditional plans and income-driven ones, and which you choose will affect your repayment date, total interest paid, and the likelihood of forgiveness.
That 45 million number is huge, but what’s even more staggering is the total amount of student loan debt – it’s currently $1.56 trillion.
But this article isn’t to focus on that total amount of student loan debt, it’s a guide to help you find the right student loan repayment plan for your unique situation.
In this guide, I will be covering specific student loan repayment options, like:
- Income-Based Repayment (IBR)
- Income-Contingent Repayment (ICR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
- Public Student Loan Forgiveness (PSLF)
That’s a lot to dig into, so let’s go!
First, what are student loan repayment plans?
When you borrowed money to pay for college, you took out a student loan, and that came in one of two ways: a federal or private loan. Federal loans offer you a variety of student loan repayment options – if you fall into this category, then you’ve come to the right place!
Each of the repayment plans gives you slightly different options for the length of your loan (term), and the income-driven plans (IBR, ICR, PAYE, and REPAYE) take your income and sometimes family size into consideration.
Why are income considerations important?
Let’s say you graduated with $80,000 worth of student loan debt, get a job making $40,000 a year as a teacher, and then you throw a couple of kids in the mix. It could be extremely difficult to make payments on one of the traditional (standard, graduated, and extended) plans.
While I’m a huge proponent of increasing your income with a side hustle to reduce your student loan debt, I also realize that there are times when you need other options.
In a different situation, like if you graduated with $60,000 in student loan debt, are single, and get a tech job that starts at $70,000, then one of those standard plans might be much more doable.
The goal of student loan repayment plans is to give you options for how you pay off your debt, and they are only available with federal student loans. If you do have private loans and are looking to lower your interest rates or streamline your payments, refinancing your student loans with a company like Credible might a good choice for you. You can learn more about Credible at Credible Review 2019: An Online Student Loan Marketplace.
Pro tip: For more on refinancing, I cover it all in my Ultimate Guide to Refinancing Student Loans.
Traditional student loan repayment options
The most important thing to know about traditional repayment plans is that they are not based on your income. Your monthly payment is determined by your total student loan debt and your repayment term.
All federal loans are eligible for the traditional plans, so that’s:
- 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
The three traditional plans are as follows:
This plan offers fixed rates on a 10-year loan term, so your payments are the same every single month. If you have an idea of what your average interest rate is, you can use this student loan payment calculator to see what your monthly payments will look like with the standard plan.
This is the same as the standard plan, except that your loan term is 25 years. So, the same payment every month for 25 years. Your payments will be lower, but you’ll pay more in interest over the course of your loans.
This plan still has a 10-year term, but you start with a much lower payment in your first two years. Every two years, your payments increase, but never more than three times greater than any other payment.
Which traditional plan is best?
This is honestly going to depend on your situation, like whether or not you can currently afford your monthly payments and whether or not your income will increase as you work. Here are a few key points to help you decide:
- If you know you can afford your payments every month, the standard plan will save you the most money on interest over the course of your repayment.
- The extended plan will cost you more in interest than the standard or graduated plan.
- The graduated plan might be ideal if you know that your income will increase over the course of your loan term.
If you want to destroy your debt quickly, the debt snowball and avalanche are two repayment strategies that can help you save thousands of dollars on interest and reduce the length of your loans.
Income-driven student loan repayment options
These options are going to get a little more complicated, but the basic idea of income-driven repayment plans (IDR) is that your payments are based on your income and family size. Remember the example earlier of the teacher making $40,000 a year that has two kids and $80,000 in student loans? That’s just one of the situations these plans are meant to help.
Important things to know about IDR plans:
- You will have to verify your income and family size each year to maintain eligibility.
- Depending on the plan, your payments will be set at 10-20% of your discretionary income, which is the difference between your adjusted gross income (AGI) and 150% of the poverty guidelines for your family size. This is called a partial financial hardship or PFH.
- If you have a balance at the end of your term that is forgiven, that balance will be treated as taxable income.
- Federal loans taken out by parents are not eligible for IDR plans, unless you choose the ICR option and have a Parent PLUS loan.
Here are the income-driven student loan repayment options, and you’re going to notice some subtleties as you read on, so pay attention:
Income-Based Repayment (IBR)
First, you need to demonstrate a partial financial hardship to qualify for this student loan repayment option.
If you borrowed on or before July 1, 2014, your repayment term is 20 years and your monthly payments are 10% of your discretionary income. If you borrowed after that date, your repayment term is 25 years and your monthly payments are 15% of your discretionary income.
Income-Contingent Repayment (ICR)
ICR offers you a 25-year term with payments based on 20% of your discretionary income. This isn’t the ideal option because of the interest burden, but it’s one of the only IDR options available to parent borrowers.
Pay As You Earn (PAYE)
This plan is really pretty comparable to IBR, and you will also need to demonstrate a partial financial hardship to qualify for PAYE. This plan may also require you to consolidate certain loans.
PAYE has a 20-year term with monthly payments capped at 10% of your discretionary income.
To be eligible for PAYE, you also need to have borrowed on or after October 1, 2007, with no outstanding loans prior to that. AND, received a loan disbursement on or after October 1, 2011, or consolidated before that date.
Revised Pay As You Earn (REPAYE)
The loan terms with REPAYE are 20 years for undergraduate students and 25 years for graduate students, and your monthly payments are 10% of your monthly income.
Anyone with a federal student loan can qualify, and your spouse’s income will be used even if you file separately.
More things to know about income-driven student loan repayment options:
- Loan forgiveness. For undergrad borrowers using IBR, PAYE, REPAYE, if you haven’t repaid your loan within the term, which sometimes does happen for those with a lower discretionary income, the remaining balance will be forgiven. For graduate borrowers using REPAYE, you can receive forgiveness after 25 years of payments. Remember, though, that forgiveness is taxed as income.
- Filing status. For IBR, PAYE, and ICR, you can choose your preferred income tax status. Know that filing jointly will increase your AGI, but it also allows for more tax credits and deductions.
- IBR vs. PAYE. These two are really close, but you’ll feel the difference if you’ve borrowed after July 1, 2014. Under PAYE, your payments are capped at 10% of your income, not 15%, and you can receive forgiveness five years earlier.
- Interest subsidies. With PAYE and IBR, if the interest you accrue is greater than your payment, the government will pay the difference for up to three years. The PAYE plan also limits capitalized interest to 10%, IBR does not. With REPAYE, the government subsidizes unpaid interest for longer than three years.
- Recertifying your income and family size. You will have a deadline to report changes to your income and family size, and there are consequences if you don’t, so mark your calendar.
So, which IDR plan is best?
Out of these four options, PAYE is generally the best bet for borrowers, but it’s harder to qualify for because of the three eligibility requirements – the two dates and experiencing a partial financial hardship.
Public Service Loan Forgiveness (PSLF)
Knowing that public service workers typically earn significantly less, the PSLF plan is an option if you are working full-time in the public service sector for a qualifying employer, which includes:
- Government organizations
- 501(c)(3) organizations
- Not-for-profit organizations that don’t have 501(c)(3) status
- AmeriCorps and Peace Corps volunteers also qualify
After you’ve made 120 payments on any Direct loans, the remaining balance of your loan will be forgiven, but you won’t be taxed for your forgiveness like IDR plans.
You will need to be on the Standard payment plan or one of the four IDR plans to be eligible, and if you know your loans will be forgiven, an IDR plan is just going to save you more money.
Keep this in mind: PSLF plans currently have a pretty uncertain future, with 99% of applicants being rejected even though they thought they had met the eligibility requirements.
Calculate your payments with each repayment plan
StudentLoans.gov has a really handy calculator that takes a lot of the guesswork out of choosing between all of these plans, traditional and IDR. To use the student loan repayment calculator, you need to log-in to their website to collect your federal student loan information.
How to choose the right student loan repayment plan for you
You get a six month grace period after you finish college that’s ideally there to let you find a job before you start making payments. It’s also when you should start exploring each of these options to figure out which one is best for you.
A lot of that is determined by how much money you’re making and how a family fits into your financial situation. You can use that calculator I linked to get an idea of what your payments are so that you can see how each plan fits into your budget.
To officially choose a repayment plan, you do that through your student loan service provider (MyFedLoan is an example of one student loan servicer), and you can always talk with them to find out more. If you don’t pick a repayment option, you will automatically be enrolled in the Standard plan, and contact your servicer to make a change.