How to Pick the Best Student Loan Repayment Plan

Just starting to pay back your student loans, or have you been making payments on them for years? Either way, it pays to understand federal student loan repayment plans.

How to Pick the Best Student Loan Repayment Plan

Even if your loan servicer has already set your monthly payments, you can choose to switch to a new repayment plan. This is especially helpful if you want to pay off your loan more quickly or if money is tight and you need to reduce your payments.

With all the repayment plan options–and with many that sound quite similar to one another–it’s important to understand what’s available. Then, you can make the choice that works best for your needs.

One caveat here: these repayment plans only refer to federal student loans. If you took out private student loans, as well, you may be out of luck when it comes to repaying those. However, many private loan servicers have their own repayment plan options, so it never hurts to ask.

To learn more, check out our Complete Guide to Student Loans.

A second caveat: Repayment plans do not involve lowering your interest rate. If you want to refinance a student loan to a lower rate, you’ll need to look at private student loans.

To learn more, check out 7 Ways to Refinance Your Student Loans.

The Options

Standard Repayment Plan: This is the 10-year repayment plan that your loan servicer most likely defaulted to when setting your monthly payment amounts. This plan has you paying a set amount each month, and is set up to pay back your loan in 10 years. If you consolidate multiple loans into one large one, your standard repayment plan payback period can be up to 30 years, depending on your consolidated loan amount and terms.

Here’s what else you need to know about the Standard Repayment Plan:

  • It’s available for all types of federal student loans, including consolidated loans.
  • Any borrowers, including parents, are eligible for this plan.
  • It’ll have you paying the least amount of interest over time.

Graduated Repayment Plan: With this plan, your payments start out lower and then increases. The increase typically comes in two-year increments. Like the Standard Repayment Plan, this one will pay back your loans in 10 years, or up to 30 for a consolidated loan. At the beginning of your repayment, the Graduated Plan can keep your payments much lower than with the Standard Plan. But nearer the end of the loan term, your payments will be much higher.

Here’s what else you need to know about the Graduated Repayment Plan:

  • It’s available for all types of federal student loans, including consolidated loans.
  • All borrowers, including parent PLUS loan borrowers, are eligible.
  • You’ll pay more interest over the life of the loan than with the Standard Plan.

Extended Repayment Plan: This plan comes with different payment “flavors.” Your payments can be set, as with the Standard Plan, or graduated. With this loan, you can extend your repayment period to up to 25 years, even on non-consolidated loans. This lowers your monthly payments, but increases the amount of interest you’ll pay over the life of the loan. Other relevant information includes:

  • This repayment plan is available for all federal student loans, including PLUS loans.
  • Direct Loan borrowers can only choose this plan if they have more than $30,000 in outstanding Direct Loans.
  • FFEL borrowers must have more than $30,000 in outstanding FFEL Program loans to choose an extended plan.

How to Pick the Best Student Loan Repayment Plan pinRevised Pay As You Earn Repayment Plan (REPAYE): This plan gives you a bit more flexibility in your payments, and can be helpful if you’re strapped for cash or if your income fluctuates from year to year. This plan sets your monthly payments at 10% of your discretionary income. Discretionary income is anything you earn above 150% of the federal poverty level for your family size.

If you have a family of four in 2016, your discretionary income is anything you earn above $36,375 per year. Payments are calculated annually and are based on your updated annual income and family size. If you’re married, your spouse’s income will be included in the discretionary income calculations, even if you file taxes separately.

With this plan, if you haven’t paid your loans after making monthly payments faithfully for 20 or 25 years (depending on the terms), the outstanding balance will be forgiven.

Here’s what else you need to know about the REPAYE plan:

  • It’s available for Direct Subsidized and Unsubsidized Loans, Direct PLUS loans made to students, and Direct Consolidation Loans that do not include PLUS loans made to parents.
  • Any Direct Loan borrower with the right loan type can use this plan.
  • Your monthly payment may actually be more than on the 10-year Standard Plan, depending on your income.
  • The interest you pay depends on your monthly payment amount.
  • You may have to pay income tax on any forgiven loan balance.

Pay As You Earn Repayment Plan (PAYE): This plan is similar to the REPAYE option, but with this plan, your maximum monthly repayment is 10% of your discretionary income. Your payment can actually be lower if you have a high debt-to-income ratio. And your payment will never be higher than it would be under the Standard Plan.

Again, your spouse’s income will count towards the figure of discretionary income, and any outstanding balance on your loan will be forgiven after 20 years of monthly payments. What else do you need to know?

  • This plan works for Direct Subsidized and Unsubsidized Loans, Direct PLUS loans made to students, and Direct Consolidation Loans that don’t include PLUS loans made to parents.
  • To use this plan, you must be a new borrower on or after October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011.
  • To use this plan, you must have a high debt-to-income ratio.
  • You may have to pay income taxes on any forgiven loan amounts.
  • Because your payment is the same as or lower than with the Standard Repayment Plan, you’ll pay more in interest over the life of the loan.

Income-Based Repayment Plan (IBR): With this plan, your monthly payments will be between 10% and 15% of your discretionary income. Payments are recalculated annually based on your income and family size, and your spouse’s income counts towards your overall family discretionary income. As with the two above options, your outstanding balance will be forgiven if you haven’t paid the loan back after 20 or 25 years, depending on your repayment terms.

Here’s what else you need to know:

  • This repayment plan is an option for all loans made directly to students, including Subsidized and Unsubsidized Federal Stafford Loans.
  • To qualify, you must have a high debt-to-income ratio.
  • Your payment will never be higher than it would have been under the Standard Repayment Plan.
  • Because your payment is the same as or lower than with the Standard Repayment Plan, you’ll pay more in interest over the life of the loan.
  • You may have to pay income tax on any forgiven loan amount.

Income-Contingent Repayment Plan (ICR): This repayment plan gives you a slightly higher payment than the other income-based options, but will likely pay off your loan faster. With this plan, your payment will be the lesser of 20% of your discretionary income or the fixed amount you would pay to repay the loan within 12 years.

As with similar plans, your payments are recalculated annually based on your family’s size and family income, including your spouse’s income if you’re married. The balance of your loan can also change your monthly payment with this plan. Any outstanding loan balance unpaid after 25 years will be forgiven.

Here’s what else you need to know:

  • This plan is available for Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, and Direct Consolidation Loans.
  • Any Direct Loan borrower with the right types of loans can choose this repayment option.
  • Your monthly repayment may be more than the 10-year Standard Plan repayment amount.
  • Parent borrowers can use this plan by consolidating Parent PLUS Loans into a Direct Consolidation Loan.
  • You may have to pay income tax on any balance that is forgiven.

Income-Sensitive Repayment Plan: Here’s yet another option where your payment amount varies depending on your income. With this option, though, your lender actually sets the formula for determining your monthly payment. With this plan, your monthly payment is based on your annual income, and is refigured annually. Your repayment period can last for up to 15 years with this plan.

Here’s what else you should know about the Income-Sensitive Repayment Plan:

  • This plan is available for Subsidized and Unsubsidized Federal Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans.
  • You’ll pay more over time than under the 10-year Standard Repayment Plan.

So Which Option is Best for You?

That’s a long list of student loan repayment options, many of which are confusingly similar. So which option is best for your needs? That depends on your particular situation, including your income, your other debts, and your debt repayment goals. But here are things you should consider when choosing:

First, Understand the Terms

Before you make any of these choices, be fully aware of what you’re choosing. It’s tempting to just choose the option with the lowest monthly payment. But that will have you paying more interest over time–not to mention staying in debt even longer!

The easiest way to figure out what each of these repayment plans actually means for your personal finances is to use the Federal Student Aid Repayment Estimator tool. You just put in your information, and the tool will tell you your estimated monthly payments, inte

For instance, let’s say you owe $25,000 on a Federal Direct Unsubsidized Consolidation Loan with a 7.5% interest rate. You’re married filing jointly with your spouse, and you have a combined annual income of $50,000. You live in Indiana with your four kids.

Here’s what the calculator gives you for your repayment options, including the total amount you’ll pay over the life of your loan under each plan:

Repayment Estimator1

In this case, the income-based repayment plans will actually have you pay off the loan more quickly than the Standard Plan, and they’ll save you money over time, too.

But what if you only make $30,000 a year, and you’re struggling to put food on the table for your family of four? In this case, the Standard Repayment Plan might be a stretch, but the Income-Contingent Repayment Plan could be a feasible option for eventually paying back your loan.

Repayment Estimator2

Running your situation through this calculator won’t automatically give you an answer about which repayment plan will work best for your needs. But it can give you the information you need to make an informed decision.

Next, Understand Your Goals and Limitations

If you don’t already have a budget, now is the time to get one. Without an idea of your monthly income and outflow, it’s difficult to figure out what you can actually afford to pay on your student loans.

While you’re at it, figure out what your goals are for repaying your student loans. If you’d prefer to pay them off as soon as possible, opt for a more aggressive plan. If you have a variable income and need more flexibility, choose a lower monthly payment and make extra payments when you can. If you have a relatively low interest rate, a lower-payment plan that leaves you budget for investing can be a good idea.

The bottom line here is that within the plans that are available to your situation, you need to choose the one that best fits with your financial limitations and goals.

Some Advice for Different Situations

With all this said, it can still be difficult to choose a student loan repayment plan from all of these options. So here are a few “for instances” that could help guide your thinking during the process of choosing:

You’re in a promising, but low-paying, job. The Graduated Repayment Plan is one of my personal favorites for new grads, especially those who already have a full-time job. Chances are you’re not making bank right out of college, but if you’re in a promising job, you can count on raises over the next few years.

With the Graduated Plan, your payment will likely rise every two years, giving you plenty of space to earn a raise before your student loan payment jumps up. And since the Graduated Repayment Plan pays off your loan in 10 years, it gets you out of debt just as quickly (though not for as little total interest) as the Standard Plan.

Your income is low and fluctuating. If money is really tight right now, and your income fluctuates frequently, the Pay As You Earn and Revised Pay As You Earn options might work best. Another option is the Income-Based Repayment Plan. These would give you the lowest monthly payment to start, and would continue to adjust based on fluctuations in your annual income.

Keep in mind that these programs can be tough, though, if you go from a high-earning year to a low-earning year. Say, for instance, you make $50,000 in 2016. Your student loan payments would be based on that amount for all of 2017. So if your income drops precipitously, making those payments might be tough. If your income drops enough, you can always apply for a forbearance, if need be.

You work for the government, a 501(c)(3) nonprofit, or certain other nonprofits. In this case, you might qualify for the Public Service Loan Forgiveness program. This program offers early loan forgiveness as long as you meet certain requirements. To qualify you must:

  • Work full-time (at least 30 hours per week) in one qualifying job or a combination of qualifying part-time jobs.
  • Not count time spent on religious instruction, worship services, or proselytising towards your full-time employment requirement.
  • Have qualifying loans, including: Direct Loans or Direct Consolidation Loans.
  • Make 120 payments while employed in your qualifying job. Qualifying payments are made:
    • After October 1, 2007
    • Under a qualifying repayment plan
    • For the full billed amount
    • 15 days or less after your due date
    • While working full-time for a qualifying employer
    • These payments cannot be made when you’re not required to make payments, such as during deferment or forbearance, or while you’re in school.

After 10 years’ worth of payments, any remaining balance on your loan will be forgiven. Obviously, if you make all or most of your 120 payments under the Standard Repayment Plan, your loan will be paid in full, anyway. If you use an income-based repayment plan, however, you’ll likely have a balance left on your loan, which can be forgiven through the PSLF.

If there’s an excellent chance you’ll qualify for PSLF, you might consider choosing an income-based repayment plan that works for you–especially if you’re in a relatively low-paying job at a nonprofit or government organization. Once you’ve made 120 payments, you can fill out the Employment Certification for Public Service Loan Forgiveness form to see if you qualify for loan forgiveness.

You have cash to spare. So what if you’re in an excellent job with a steady income right now, and you’ve got money to spare? In this case, choose the Standard Repayment Plan, and throw some extra money at your student loans if your goal is to get out of debt.

Why the Standard Plan with some of the income-based plans could give you a higher monthly payment and a shorter loan term? If you can afford the Standard Repayment plan plus some extra–even if it’s just $50 a month–there’s no reason to file the extra annual paperwork required for an income-based plan. Just pay your extra as you can, and pay off your loan more quickly on your own.

Changing Plans

Remember, even if you’re doing great with your Standard Repayment Plan now, stuff happens. If you lose your job or take a paycut to start your own business, you can change your repayment plan. Most servicers will let you change repayment plans on an as-needed basis, though you’ll need to check with your lender to ensure you can change multiple times if necessary.

For the most part, student loan servicers offer great online tools for checking your payments under different repayment plans. You’ll likely need to file hard-copy paperwork to actually get your plan changed, and you’ll need to include your most recent tax paperwork for any income-based plan. But changing plans is straightforward, so don’t worry about locking yourself into a plan forever that may someday prove to be too much.

Choose the plan that works best for you right now, and make adjustments as needed.


Topics: Education

2 Responses to “How to Pick the Best Student Loan Repayment Plan”

  1. Hey Abby, this is a very detailed post and I know it will help out many dough roller readers. Anyone who is serious about getting out of student loan debt should immediately do the calculator scenario to figure out their best payment options. Take Care.

  2. Do you know how this works with people who are self employeed? I am an independent contractor so my paychecks say I make $120k but that doesn’t have taxes or expenses taken out which are a huge chunk of that money. Can you speak a little on how to submit in that kind of case?

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