Which Student Loan Repayment Options Work for You?
The student loan process can be tricky and difficult to understand. Students often overlook the process from the beginning of college until graduation, never realizing the impact of the loans until payment become due six months after graduation. The advisement sessions on the FAFSA website become quick-click answer sessions as you electronically sign documents and come face-to-face with your repayment options. Those options seem foreign, and the sudden decision needed to move on with your life sets up the way you will make payments for the foreseeable future. You likely do not know what employment you will have or which plan is right for you. Below, we have explained the repayment options for Federal student loans so that you may make an educated choice.
Standard Repayment Plan
This option gives you the quickest route to paying off your student debt. As a result, you will pay less on interest for your loans. Your payments will be a fixed amount that will repay the debt completely over ten years (30 years for Consolidation Loans). All borrowers are eligible, but it may not be for everyone. In order be successful through this plan, you should have a career lined up that will allow you to make enough money to make the payments while ensuring you have enough money to sustain your lifestyle without defaulting on the loan.
Graduated Repayment Plan
This plan works similarly to the Standard Repayment Plan, but with a few changes. You will be able to pay off your student debt over ten years, but the payment will begin in smaller increments. After a period of time, usually two years, your payments will increase in amount. This means that your final payments will be much larger than the final payments on the Standard Repayment Plan. This option is available for all borrowers, but you should have a career lined up that promises periodic advancement. This also may help if you are building your life after school. You will be able to buy purchase furniture and other supplies before getting into higher payments.
Extended Repayment Plan
This option works similarly to the previous two, but repayment can occur over a period of time up to twenty-five years. The payments can be either fixed or graduated. The downside will be the buildup of interest. You will be paying more overall and burdened for a longer period of time. In order to uses this option for FFEL or Direct Loans, you will need to have accrued over $30,000 in loans. This would be a good plan for borrowers who spent a longer time in school or took out more in loans. It prevents payments from becoming so overwhelming that you cannot afford to live.
Revised Pay As You Earn Repayment Plan (REPAYE)
This plan bases payments off of income. Your monthly payments will be 10% of discretionary income. This means that they take into account rent, money for food, and other necessities when determining your income each year. Your remaining balance will also be forgiven if you do not repay the full amount after twenty-five years. This is a great option if you are unaware of what your income will be six months after graduation or if you plan on participating in the Public Service Loan Forgiveness (PSLF) program.
Pay As You Earn Repayment Plan (PAYE)
This option works very similar to REPAYE. Your maximum monthly payments will be 10% of monthly income, but they may never exceed what you would pay under the Standard Repayment Plan. You must be a new borrower on or after October 1, 2007 or have received a disbursement on or after October 1, 2011. Your outstanding balance may be forgiven after twenty years. It also works great with PSLF.
Income-Based Repayment Plan (IBR)
This option is available to borrowers that have a high debt relative to their income. Your payments will be 10% or 15% of your discretionary income, but they will never exceed what you would pay on the Standard Repayment Plan. Any outstanding balance will be forgiven after twenty or twenty-five years. This is another great option to use in conjunction with PSLF.
Income-Contingent Repayment Plan (ICR)
This option differs from the IBR in several ways. For starters, it does not cover FFEL loans. Your payments will be 20% of discretionary income or what payments would be on a repayment plan over twelve years, whichever is lower. In addition, your payments can be higher than if you were on the Standard Repayment Plan. You will also have to pay income taxes on your payments, but your outstanding debt will be forgiven after twenty-five years. This option would be available to borrowers who do not meet the standards of the debt-to-income ratio for other income-based plans. It also qualifies for PSLF.
Income-Sensitive Repayment Plan
This option only covers Stafford and FFEL loans. Payments are based on monthly income, but repayment must be complete in fifteen years. The formula for determining payments varies from lender to lender. This plan would be great for those who would like an income-based plan, but would like to pay off their debt relatively quickly.
The best option for you to pay off your student loans is dependent on your situation and the size of the loan. Before you decide on a plan, visit https://studentaid.ed.gov/sa/repay-loans/understand/plans#estimator. They have more information on each plan, a calculator to help determine the right pan for you, and access to FAFSA resources. Make sure you know what loans you have and the best options to pay them off.