Student Life: Making Sense of the Many Student Loan Repayment Options
Let's just be honest for a minute: When we're signing our name to a student loan, even if the rules and fine print seem to make sense at the time, none of us really, fully understand what it will be like to start paying off those debts after finishing our time at university.
Where it really gets surprising - and often tricky - is when we're offered an abundance of repayment options that 'best suit our current situation.' But which one's for you? What are the pros and cons of each?
Standard Repayment Plan
This is the repayment plan you're automatically enrolled in from the get-go. It requires you to make fixed, monthly payments (of $50 and up) for up to 10 years until your loan is paid off.
- Pros: Because you'll pay off your student loan more quickly on this plan than the others, you'll pay less interest in the long run.
- Cons: Your monthly payments will be higher than they will be on other plans.
- It's For You If: You can afford the high monthly payments and just want to get done paying your student loan back.
Graduated Repayment Plan
On the Graduated Repayment Plan, your monthly payments start low and gradually increase (every two years.)
- Pros: Your loan will still be paid off in full within 10 years.
- Cons: When compared to the Standard Plan, you'll end up paying more in interest over the course of paying off your loan.
- It's For You If: You can't currently make the monthly payment required on the Standard Plan, but are confident your income will steadily increase over the years.
Extended Repayment Plan
This repayment plan has a window of up to 25 years and is flexible in that you can set fixed, monthly payments (like on the Standard Plan) or increase the amount of the monthly payment gradually (like the Graduated Plan.) However, you must have more than $30,000 in Direct Loans or Federal Family Education Loans (borrowed after October 7, 1998) to qualify for this option.
- Pros: You can choose to set smaller monthly payments and it allows for way more time to pay off your loan (25 years!)
- Cons: You'll be spending a lot more time paying off your loan and, as a result, pay more in interest.
- It's For You If: You need to lower your monthly payment (but keep in mind, because of interest, you'll end up paying more in the long run.)
Income-Based Repayment (IBR)
With this plan, your monthly payments are capped at 15% of your discretionary income, and they are readjusted each year based on changes in your income and household. To qualify for the IBR repayment option, you must be eligible for a "partial financial hardship" - which you can estimate here.
- Pros: If you make regular payments on this plan for 25 years and still haven't paid off your loan entirely, then any remaining student loan debt is forgiven. Even better, if you work in a public service, remaining debt may be forgiven after just 10 years.
- Cons: You have to be able to provide documentation every year to your loan service provider that shows your proof of income. You might also end up paying more in interest over the lifetime of the loan than using other options. If your debt is forgiven after 25 years, you still have to pay income tax on that debt.
- It's For You If: You are eligible for the plan and need to make your monthly repayments more affordable.
Pay-as-You-Earn Repayment (PAYE)
Similarly to the IBR plan, with the PAYE option, monthly payments are capped at 10% of your discretionary income and readjusted each year based on your income and family size. You must also qualify for this repayment plan.
- Pros: If you make regular payments, the government may forgive your remaining debt after 20 years (or 10 years if you work in a public service.) Interest is not capitalized unless you're no longer in a financial hardship.
- Cons: Pre-2011 graduates typically don't qualify. As with the IBR plan, you'll also have to annually provide documentation of your income to your loan servicer (or otherwise be placed on the Standard Plan.)
- It's For You If: You qualify and you want to keep your monthly payment low and affordable. This plan is especially helpful to graduates coming from costly courses of study, like law and business school.
Income-Contingent Repayment Plan
On this plan, your payments change as your income changes and are based on your adjusted gross income, family size, and the amount of your loan (another 25-year-option.)
- Pros: Any remaining student loan debt is forgiven if it's not been paid off with regular monthly payments after 25 years.
- Cons: You'll pay more in interest over the lifetime of your loan and may have to pay income tax on any forgiven debt. Interest on your loan may be capitalized once per year (so that you'd be paying 10% more than your original loan amount.)
- It's For You If: You don't qualify for the IBR or PAYE options, but want to lower your monthly payments.
Income-Sensitive Repayment Plan
Your monthly payments are based on your annual income. This is alternative to the income-contingent plan, for those who might not qualify for it.
- Pros: You determine the percentage of your monthly payment (between 4% and 25% of your monthly gross income.)
- Cons: You can only stick with this plan for five years, then you'll be moved to another. You must reapply annually and might not be eligible for continued enrollment.
- It's For You If: You're income is low and you'd like some flexibility in setting your own repayment terms.
For more in-depth information and detail concerning each of these student loan repayment options, visit StudentAid.gov.