Student Loan Repayment Options: What’s the Best Way to Pay? – Personal Loans
Table of Contents
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Federal Repayment Options
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Which Federal Option Is Best?
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Private Student Loan Options
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The Bottom Line
Student loan repayment options offer borrowers some flexibility in repaying education debt. With federal student loans, you have multiple repayment paths to choose from. If you borrowed private student loans, however, your options may be more limited. The right and best way for you to pay depends largely on which type of loans you owe, how much you have to pay back, and where you are financially after graduation. This guide explores everything you need to know when creating your student loan repayment plan.
Key Takeaways
- There are eight repayment plans to choose from to pay back a federal student loan, but only four options for private student loans.
- A repayment plan that's right for one person may not be right for another, depending on their financial situation, earnings, and goals.
- It's important to consider what you need most from your payoff plan and what you can realistically afford.
Federal Student Loan Repayment Options
Altogether, there are eight repayment plans you can choose from if you borrowed federal student loans. Here's how they compare. One note: So far, the Public Service Loan Forgiveness program has rejected the majority of applicants, so be forewarned that choosing a repayment plan that is a good option for the program doesn't guarantee your loans will be forgiven.
1. Standard Repayment Plan
Who's eligible: All borrowers.
How it works: Payments are fixed, with loans paid off over a 10-year period.
Who it's good for: Borrowers who want to repay their loans over the shortest period of time to minimize interest charges.
Who it's not good for: Borrowers who are interested in Public Service Loan Forgiveness.
2. Graduated Repayment Plan
Who's eligible: All borrowers.
How it works: Payments start off lower, then increase gradually, with loans paid in full over a 10-year period.
Who it's good for: Borrowers who expect their income to increase over time and want to pay off their loans as quickly as possible.
Who it's not good for: Borrowers who are interested in Public Service Loan Forgiveness.
3. Extended Repayment Plan
Who's eligible: Direct Loan and Federal Family Education Loan (FFEL) borrowers with more than $30,000 in loan balances.
How it works: Payments may be fixed or graduated, with loans paid in full over a period of up to 25 years.
Who it's good for: Borrowers who have larger loan balances and need a smaller monthly loan payment.
Who it's not good for: Borrowers who are interested in Public Service Loan Forgiveness or who want to pay the least amount of interest possible on their loans.
4. Pay As You Earn Repayment Plan (PAYE)
Who's eligible: Borrowers who received a disbursement of a Direct Loan on or after October 1, 2011.
How it works: Monthly payments are 10% of discretionary income, but never exceed what you would pay on a Standard Repayment plan.
Who it's good for: People who need a low monthly payment and/or are interested in Public Service Loan Forgiveness.
Who it's not good for: Borrowers whose income fluctuates significantly from one year to the next.
5. Revised Pay As You Earn Repayment Plan (REPAYE)
Who's eligible: Any Direct Loan borrower with an eligible loan.
How it works: Your monthly payments are set at 10% of your discretionary income.
Who it's good for: Direct Loan borrowers who need a low monthly payment and don't mind potentially paying more in interest over the life of the loan compared to a Standard Repayment plan; those interested in Public Service Loan Forgiveness.
Who it's not good for: Married couples who file a joint return and have a higher combined income.
6. Income-Based Repayment Plan (IBR)
Who's eligible: Borrowers who owe Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford loans, student PLUS loans, and consolidation loans—excluding PLUS loans made to parents.
How it works: Monthly payments are either 10% or 15% of discretionary income, based on when you borrowed.
Who it's good for: People who have a high debt balance and need smaller monthly payments due to a lower income, as well as anyone interested in Public Service Loan Forgiveness.
Who it's not good for: Borrowers who can afford to put more than 10% or 15% of their income toward student loan repayment each month.
7. Income-Contingent Repayment Plan (ICR)
Who's eligible: Any Direct Loan borrower with an eligible loan.
How it works: Monthly payments are 20% of discretionary income or the amount you'd pay over 12 years with a fixed payment based on your income, whichever is less.
Who it's good for: Borrowers who can afford to commit more of their monthly income to loan repayment, but not the amount required by a Standard Repayment plan. Also those who are interested in Public Service Loan Forgiveness.
Who it's not good for: Borrowers who owe anything other than Direct Loans or married couples who file jointly and are in a higher tax bracket.
8. Income-Sensitive Repayment Plan
Who's eligible: FFEL program borrowers.
How it works: Monthly payments are based on annual income, with loans paid in full over 15 years.
Who it's good for: FFEL borrowers who want a lower monthly payment than they'd get on a Standard or Graduated Repayment plan.
Who it's not good for: Borrowers who are interested in Public Service Loan Forgiveness
The PAYE, REPAYE, IBR, and ICR plans all offer forgiveness for remaining loan balances after a set period of time. But, these forgiven amounts may be treated as taxable income, which could potentially raise your tax bill.
Which Federal Student Loan Repayment Option Is Best?
The answer to this question is different for every borrower and it's important to consider what you need most from your payoff plan and what you can realistically afford.
"Student loan repayment isn't one size fits all, but the majority of people just try to pay back their debt normally," says Shann Grewal, vice president of IonTuition. "When borrowers don't look for a repayment plan that best fits their situation, it has outside impacts."
Your choice of plan can affect other financial decisions you make. If you commit, for example, to a Standard Repayment plan based on the salary you're making at your first job after college, that could influence your future career path if you decide to stay put until the loans are paid off. Your loans may be zeroed out, but in the meantime, you could miss out on chances to increase your salary or advance yourself professionally.
It's also important to keep income-driven repayment plans and their usefulness in perspective. Whether to choose an income-driven repayment plan can hinge on several factors, including what you're earning now and your future earning potential.
"Some students will enter the workforce immediately with a high-paying job, while others will be required to work their way up," says Lena Chukhno, general manager of student loan refinancing at Earnest. Other variables that come into play include the amount of debt owed and whether you plan to go back to school for a graduate degree at some point.
Chukhno says what's realistic for one student may not be for another, and it's important to consider long-term goals when making a student loan repayment plan. "You can always refinance your loan down the line if the situation changes, but it's best to start off on the right note so you don't get into financial trouble."
Eligibility for PAYE, REPAYE, IBR, and ICR isn't guaranteed from year to year. Your eligibility and payments are recalculated yearly, based on your family size and household income.
Private Student Loan Repayment Options
Private student loans typically offer fewer choices for borrowers. These include:
- Immediate repayment: Principal and interest payments begin as soon as your loan is disbursed.
- Interest-only payments: You make interest-only payments while in school, then begin making principal and interest payments once you graduate or drop below half-time enrollment.
- Fixed payments: You pay a low fixed amount while in school, then begin making regular payments once you leave school or drop below half-time enrollment status.
- Full deferment: You pay nothing while enrolled in school and begin making interest and principal payments within a set time frame after you leave school.
Depending on your lender, you may be eligible for a deferment or forbearance period if you're not able to keep up with your regular loan payments. But this typically requires a financial hardship and it isn't offered by every lender.
If you have private student loans, it's important to do the math so you know what the various repayment options will cost you in interest over the life of the loan. You might also consider refinancing your private loans if it would allow you to get a lower interest rate. This can save you money on interest during the repayment term. Refinancing student loans typically involves a credit check, so if you don't have a solid credit history yet, you may need a cosigner to qualify. Staying in touch with your lender is important, especially if you're struggling to manage your monthly payments.
The Bottom Line
If you owe education debt, take time to get to know your student loan repayment options. Ideally, this is something you do before graduation so you have an idea of which repayment plan you want to start with. If you're choosing an income-driven plan, be aware of the potential tax consequences and reevaluate your finances each year to see if another repayment option might be better for saving money on interest charges.
