Repayment Plans for Student Loans

Once you graduate college, you’ll start the process of repaying your loans. While you’re automatically enrolled in the standard repayment plan unless you choose otherwise, there are six other repayment plans available.

Although you might not qualify for all of them and the standard repayment plan could be the best one for you, it helps to know what all of your options are.

Standard Repayment Plan

Unless you select another plan, you’re automatically placed in the standard repayment plan. This plan requires you to make fixed monthly payments of at least $50 for up to 10 years. The advantage of the standard repayment plan is that you’ll pay less interest and you’ll pay off your loan faster when compared to other plans.

However, your monthly payments will also be higher on this plan. If you can afford the higher payments, this repayment plan is best because it can help save you money in the long run.

Graduated Repayment Plan

With a graduated repayment plan, your monthly payments start low and then increase every two years. This plan is still paid off in 10 years like the standard repayment plan. However, you do pay more interest than you would on the standard plan because your payments start out small.

If you can’t handle higher monthly payments when you first graduate but you’re confident your income will steadily increase over the years, this type of repayment plan might be ideal for you.

Extended Repayment Plan

The extended repayment plan has a repayment window of up to 25 years. Under this plan, you can choose to have fixed monthly payments, like the standard repayment plan, or monthly payments that increase over time, such as the graduated plan.

You’re only eligible for the extended repayment plan if you have over $30,000 in Federal Family Education Loans or Direct Loans that you borrowed after October 7, 1998.

The advantages of the extended repayment plan are that you have more time to pay off your loan and you have smaller monthly payments because they’re spread out over 25 years.

However, this also means you’ll pay more interest and have to deal with payments for a longer period of time.

Income-Based Repayment Plan

Under the income-based repayment plan, your monthly payments get capped at 15 percent of your discretionary income. The payments are also readjusted every year based on your family size and income. Only people who qualify for partial financial hardships are eligible for this repayment plan.

As long as you make regular payments for up to 25 years, your remaining debt might be forgiven when your loan repayment period ends. Additionally, if you work in public service, you might have some of your debts forgiven after 10 years.

However, you have to provide documentation every year that your income is still low enough to qualify. You also might have to pay income tax on debt forgiven after 25 years. Regardless, if you have a large loan, a small income, and need a way to make your payments affordable, this might be the option for you.

Income-Contingent Repayment Plan

Like the income-based repayment plan, the number of your loans, family size, and adjusted gross income are used to determine your payments under the income-contingent plan. With this plan, your payments change as your income changes. You’ll pay the lesser of these two options: a total based on a 12-year repayment plan adjusted to your income, or 20 percent of your monthly discretionary income.

While your loan balance is forgiven after 25 years of payments, you’ll also pay more over the lifetime of the loan when compared to a 10-year loan.

Income-Sensitive Repayment Plan

If you don’t qualify for the income-contingent repayment plan, you should look at the income-sensitive repayment plan. With this plan, your annual income is the basis for your monthly payments. You’ll choose a payment amount that’s between 4 and 25 percent of your monthly gross income.

However, you can only be on the plan for five years, and then you must switch to another plan.

Pay As You Earn Repayment Plan

The final repayment option available is the Pay As You Earn (PAYE) plan. Under this plan, you have monthly payments capped at 10 percent of your discretionary income, and your remaining debt could be forgiven after 20 years of regular payments.

However, you only qualify for this plan if you received your loan after October 1, 2011.

When it comes time to start repaying your loan, it helps to look at all your available options to make sure you’re choosing the right plan for your current needs.