The Advantages and Disadvantages of Student Loan Repayment Plans

When choosing a student loan repayment plan, you should consider the payment amount you’ll be making, how many months you’ll be paying it, and the total amount you’ll pay over the life of the loan. Different types of loans have different options, and not all borrowers qualify for every option, so investigate all your possibilities carefully.

Federal Direct Loan Repayment Plans

If you have a federal direct loan, you have eight possibilities for repayment.

Traditional Plans

These payment plans are available with all federal direct and Stafford loans, federal PLUS loans, and federal consolidation loans.

  • Standard repayment plan: This is the basic plan available to all borrowers. You get a fixed payment amount and up to 10 years to pay (up to 30 years for consolidations). You pay less over the life of the loan if you follow the standard repayment plan.
  • Graduated repayment plan: This option is very similar to the standard plan. The difference is that the payments are fixed only for the first two years. While they are initially lower than they would be on the standard plan, they increase every two years. Over the term of the loan, you pay more in total than you would on the standard plan.
  • Extended repayment plan: The extended repayment plan helps those with large balances. To qualify, you must owe more than $30,000 on your federal loans. Payments may be fixed or graduated, and you get up to 25 years to repay. Monthly installments are lower than under the standard or graduated plans, but you’ll pay more in total over time.

Plans Involving Debt Forgiveness

These income-driven plans are available to borrowers with federal direct, federal PLUS, and federal consolidation loans that don’t include loans to parents. All of them include possible debt forgiveness, which can be taxed as income. If you’re in a field that qualifies for public service loan forgiveness, these payment options work hand in hand with that program.

  • Revised pay as you earn repayment plan (REPAYE): Your monthly payments equal 10 percent of your discretionary income. Every year, the payment amount is recalculated to take into account your income and family size. If you’re married, your spouse’s income and loan debt become part of that equation. At the end of 20 or 25 years, any outstanding balance is forgiven. Monthly payments under REPAYE can be more than the standard plan since they’re based on income.
  • Pay as you earn repayment plan (PAYE): This plan is similar to the REPAYE. The payments are calculated the same way and updated on the same schedule. However, spousal income and debt are only considered if you file a joint tax return, and outstanding balances are forgiven after 20 years. This option is only available if you were a new borrower on or after October 1, 2007, who took a disbursement on or after October 1, 2011. Your debt-to-income ratio must be high. Your monthly payment is capped at what it would be under the standard plan.
  • Income-based repayment plan (IBR): This flexible option is the same as the PAYE as far as consideration of spousal income and debt. Your monthly payment is either 10 or 15 percent of your discretionary income, and it’s recalculated every year. The balance is forgiven after 20 or 25 years. Like the PAYE, your debt as compared to income must be high and the same payment cap applies. This plan is more expensive over time than a standard plan.
  • Income-contingent repayment plan (ICR): Under an ICR plan, the monthly payment calculation is more complex than the IBR. The installment amount is the lesser of the following:
    • 20 percent of the discretionary income
    • the payment you would make on a repayment plan with a fixed amount over 12 years, adjusted for income.

Make sure to compare and contrast each of the plans involving debt forgiveness. Below you will find a comparison chart of the four main income-driven repayment plans for federal student loans:

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The payment may exceed what it would be under a standard plan. Recalculation happens every year and the balance is forgiven after 25 years. Spousal income and debt are considered if you file a joint tax return or if you choose to include them. This option is available to parent borrowers who consolidate under certain guidelines.

Income-sensitive repayment plan: This option calculates your payments according to your annual income and gives you up to 15 years to repay. The lender chooses the repayment formula, so be sure you have a clear understanding specific to your financial institution. Paying this way costs you more over the life of the loan than you would pay under a standard 10-year plan. The payment may exceed what it would be under a standard plan. Recalculation happens every year and the balance is forgiven after 25 years. Spousal income and debt are considered if you file a joint tax return or if you choose to include them. This option is available to parent borrowers who consolidate under certain guidelines.

Though it can seem overwhelming at times, it’s important to think carefully through all your repayment options and the pros and cons of each. This is a decision that can affect you for the next 20 to 30 years, so don’t rush into or sign anything that you don’t fully understand.