Student loan debt is a part of life for millions of current college and university students and graduates throughout the United States. Once the grace period ends on student loans, borrowers are required to begin what is in most cases the long process of repayment. Without making any changes to student loans, recent graduates are automatically put on a standard repayment plan that requires equal monthly payments over the course of ten years.
However, depending on the amount that needs to be repaid over time, a ten-year duration often forces student borrowers to pay an amount that far exceeds their financial means. Whether you are a student borrower in repayment or still in deferment, it is important to understand the student loan repayment plans available and which works best for your circumstances.
Related: PPP010: How to Pay Off Student Loans
Federal Student Loan Options
Nearly 90% of all student loan debt in America is in the form of federal student loans, given the degree of ease borrowers can acquire the amount of funding they need to attend a college or university. Under the federal student loan program, borrowers have multiple options as it relates to repayment which makes it challenging to know which one is best-suited for each situation. Here is a breakdown of the eight federal student loan repayment programs, and borrowers who likely benefit the most from each.
- Standard repayment – under the standard repayment program, borrowers are placed on a predictable 10-year repayment schedule, where the same monthly payment is due in month one as it is at the end of the term. All student borrowers qualify for standard repayment; however, individuals with significant amounts of student debt may not be able to afford the monthly payment easily. Additionally, borrowers who qualify for a program that forgives any remaining balance at the end of the repayment term may benefit more by selecting a different repayment plan.
- Graduated – similar to the standard repayment, borrowers who select a graduated plan pay over ten years and no forgiveness is available at the end of the term. However, payments begin at a lower amount and increase every two years on a set schedule. This repayment plan is a strong choice for borrowers who know their income is slated to go up over time, enough to afford the payments as they increase.
- Extended – under an extended repayment plan, borrowers who have Direct and FFEL loans dispersed after October 7, 1998, and a balance of more than $30,000 can have repayment spread out over 25 years. The monthly payment is calculated as a percentage of discretionary income, either 10 or 15%, and changes over time as earnings increase or decrease. Extended repayment plans are suitable for borrowers who have a substantial amount of debt to repay or those who do not qualify for a forgiveness program.
- Income-based – borrowers who meet the criteria of a financial hardship may qualify for an income-based repayment program. Monthly payments are either 10 or 15% of discretionary income but never more than the standard repayment amount, and repayment is extended for 20 or 25 years based on the total amount due. Borrowers who work for in public service and select an income-based repayment plan can request forgiveness of the remaining balance after ten years, while those who work in the private sector may request forgiveness at the end of the repayment term.
- Pay As You Earn – borrowers who have direct loans funded after October 1, 2007, and experience a partial financial hardship are eligible for Pay As You Earn plans. Monthly payments are capped at 10% of discretionary income and change as income increases or decreases. As with income-based repayment, public service forgiveness is available after ten years while all other borrowers have their remaining balance forgiven at the end of the 20-year repayment term.
- Revised Pay As You Earn – any borrower who has a direct loan qualified for the revised pay as you earn plan. Repayment is extended either 20 or 25 years, based on the amount due, and monthly payments cannot exceed 10% of the borrower’s discretionary income. Both public service forgiveness and full term forgiveness are available.
- Income-contingent – borrowers with direct loans qualify for income-contingent plans. The repayment term extends up to 25 years, and monthly payments are the lesser of 20% of discretionary income or what the borrower would pay on a 12-year fixed payment plan. Public service forgiveness and full term forgiveness are available to qualified borrowers.
- Income-sensitive – under an income-sensitive repayment plan, borrowers with FFEL loans can extend repayment over a 10-year period, and monthly payments are based on annual income determined by the lender. Forgiveness is not available with income-sensitive plans, but borrowers with small loan amounts and lower income may find this plan the most suitable.
When selecting an appropriate repayment plan, it is important not only to consider monthly budget constraints but also to recognize that any amount forgiven under an income-based plan is taxable in the year forgiveness takes place. Here is another resource on the topic of income-driven repayment plans.
Related: How to Manage Student Loan Payments When Self-Employed
Loan Consolidation and Refinance
Borrowers with student loan debt through the Department of Education have an opportunity to consolidate multiple loans into a single, easier-to-manage loan through this site. Consolidation offers borrowers the benefit of one monthly payment and simple organization of student debt. However, the interest rates across all federal student loans are aggregated into one which may end up being slightly more. This could cost borrowers more over the life of the loan. Most income-based repayment plans encourage the process of consolidation of eligible loans so that the servicer can calculate accurate monthly payments.
For borrowers who have federal, private, or a combination of federal and private student loans, refinancing may be an option for lowering monthly payment obligations as well as the overall interest rate. Refinancing is similar to consolidation in that it involves taking out a single, large loan to cover all student loans, but instead of being serviced through a Department of Education partner company, a refinanced loan is managed by a private lender. Refinanced student loans are available to borrowers who have a strong credit history and a proven track record of earnings, and interest rates offered by private lenders are either fixed or variable. However, once student loans are refinanced, there is no option to reduce the monthly payment or switch to an income-based plan with a private lender. Refinancing is a smart option for borrowers who have high-interest rate loans, or those who do not qualify for income-based repayment plans through federal programs.
Managing student loan repayment requires some work from borrowers. Start by understanding what types of student loans are in play, and then focus on the repayment programs available for either federal or private programs. Take the time to work through income and other expenses so that you know for certain a repayment plan fits within your monthly budget, and work directly with your student loan servicer to change your plan as needed.