Savvy Financial Solutions
Paying for college can be a daunting task, and for many people, the only way to cover the cost is by taking out student loans. However, once one graduates, the task of repaying those loans can be quite overwhelming. Fortunately, there are several different repayment plans available that can make the process more manageable. The following is a list of most of the different plans available for loans issued through the Federal Direct Loan Program. Note that loans or refinances done through private companies not affiliated with the Direct Loan Program will not have access to these same plans.
- The Standard Repayment Plan: This is the most straightforward repayment plan, with a fixed monthly payment over a ten-year period. This plan is ideal for borrowers who can afford to make the same monthly payment without difficulty and want to pay off their loans quickly.
- The Graduated Repayment Plan: This plan starts with a lower monthly payment that increases every two years over a ten-year period. This is ideal for borrowers who expect their income to increase over time, but who may not be able to afford a higher monthly payment at the beginning of their repayment period.
- The Extended Repayment Plan: This plan is similar to the standard plan but with a longer repayment period of 25 years. This can be helpful for borrowers who need a lower monthly payment but want to pay off their loans faster than the income-driven repayment plans. The downside is that you’ll pay more over time with this option compared to the standard repayment plan.
- The Income-Driven Repayment Plans: There are five different income-driven repayment plans available to borrowers, which are based on their income and family size. These plans allow borrowers to make payments based on their discretionary income, usually around 10-20%, with a repayment period of up to 20 or 25 years depending on the plan. They are ideal for borrowers with a low income or a high debt-to-income ratio.
- Income-Based Repayment Plan (IBR)
- Pay As You Earn Repayment Plan (PAYE)
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Income-Contingent Repayment Plan (ICR)
- The Income-Sensitive Repayment Plan
In addition to these repayment options, you may also be eligible for loan forgiveness programs. Public Service Loan Forgiveness (PSLF) is available for borrowers who work for a government or non-profit organization, and Teacher Loan Forgiveness is available for teachers who work in low-income schools.
You can also go through a loan consolidation process which can increase the term of your loans up to 30 years. While this can lower your average monthly payment, the amount you would pay in interest over the duration of the loan would be much higher.
Also, any outstanding interest that you owe during the consolidation will be added to the principal of your loans, making your interest payments even more, albeit slightly.
Keep in mind you may also lose out on some interest rate discounts, principal rebates or loan cancellation options that may be affiliated with your original loans.
So now that you have the details, which one should you actually pick?
Are there good rules of thumb for deciding what’s best for you?
It’s important to keep in mind that the longer the repayment period, the more interest you will pay in the long run.
If you’re in a situation where you are eligible for a form of loan forgiveness, going with one of the longer-term options or an income-based repayment plan probably makes more sense.
The income-driven plans can also help provide a healthy cushion to your monthly finances if you are struggling to make the minimum payments.
There is also a “Loan Simulator” provided by studentaid.gov that can help you make a decision as well!
Navigating the different kinds of options regarding these plans you have looks intimidating, but luckily there’s a lot of overlap between many of them. It’s mainly important to analyze your income, monthly expenses, and long-term financial goals before selecting a plan that is right for you.