When it comes to paying off student loans, one fact remains — that many students find themselves struggling to meet their student loan obligations.
Statistically, more than 1 in 5 borrowers who should actually be repaying their loans are a year or more behind.1
If you’re in that boat, it helps to know what options are available so you can select a plan that is right for your financial situation.
The good thing is, federal loans come with more flexible payment options than private ones including income-driven repayment plans such as Pas-As-You-Earn (PAYE) or REPAYE.
To help you decide which option is best suited for you, here is a simplified guide to different repayment plans for federal student loans — each with its own pros and cons.
If you have a Perkins Loan or a private student loan, your repayment options will differ, but may be similar. You can find your repayment terms for these loans on the promissory note you signed when you took out the loan.
The standard repayment option is a simple 10 year fully amortized monthly payment plan with minimum payments of $50. Unless they request otherwise, most borrowers will automatically start repayment on this plan.
The upside to this option is that the loan is paid quickly, within 10 years, and it’s the least expensive in terms of total interest paid. The downside is the payment on a 10 year plan is the highest of any of the the repayment options.
If your monthly payments under this option exceed 8% to 10% of your gross monthly income, however, consider one of the following alternative options below.
The extended repayment plan allows borrowers with more than $30,000 in debt to extend the repayment period from 10 years to up to 25 years.
The upside of this program is that the monthly payments are lower than the standard plan with the downside being that the overall cost of the loan is higher due to additional accrued interest.
The graduated repayment option is a hybrid of the standard repayment plan. This plan amortizes the loan over 10 years with the payments in the beginning lower than the payments toward the end of the loan period.
The payment increases every two years during the 10-year repayment period. But there is a cap on the maximum payment in that it cannot be more than three (3) times the original payment.
This plan is best for borrowers whose income may start out low but is expected to increase. One downside is you will pay more in interest than you would under the standard plan.
04Income Based Repayment (IBR)
Under this plan, the monthly payment is determined using a sliding scale calculation that takes into consideration the borrower’s discretionary income, not the total amount borrowed.
This plan is the clear choice for anyone who may be experiencing financial hardship. For most eligible borrowers, the monthly payment amount will be less than 15% of their income (10% for a new borrower).
Additionally, any remaining debt, including interest, after 25 years of qualifying payments will be eligible for forgiven. Though the IRS will consider this taxable income.
05Pay As You Earn (PAYE)
An improved version of the Income-Based Repayment plan — known as the “Pay-As-You-Earn” (PAYE) went into effect in December 2012 — offering an even lower monthly payment.
The plan lowers the payment cap from 15% to 10% of a borrower’s discretionary income, and forgives any remaining debt after 20 rather than 25 years of payments.
The catch is that it doesn’t apply to every borrower.2 To qualify, you must be a new borrower on or after October 1, 2007, and you must have had received a new loan on or after October 1, 2011.
06Revised Pay As You Earn (REPAYE)
REPAYE, which became available in December 2015, is the revised version of the existing Pay As You Earn (PAYE) plan, that limits your payments to 10% of your discretionary income.
This plan is similar to PAYE with a few differences. The most notable difference is that it applies to anyone with federal direct loans, regardless of financial need or when the loans were taken.
Although it’s possible to qualify for a monthly payment of $0, there is also no cap on payments — a major change from the original PAYE and IBR programs. So if your income increases significantly, so could your payments.
07Income Contingent Repayment (ICR)
Income Contingent Repayment (ICR) plan is available for all borrowers with the exception of Parent PLUS loans which must first be converted into federal direct consolidation loans.
Payments are calculated each year and are based on your income, family size, and total amount borrowed but will usually be higher than payments under the IBR and Pay As You Earn plans.
The payment is capped at 20% of monthly discretionary income for a period of up to 25 years with forgiveness of the remaining balance after 25 years of payments.
Which repayment plan for student loans is best?
With so many choices, choosing the right repayment plan can be somewhat tricky. While the standard 10-year and extended repayment plans are fairly straightforward, others can be very confusing.
Whether you owe $5,000 or $50,000, you need to examine your financial situation carefully and choose the plan that best meets your ability to pay.
A great place to start is the Education Department’s Repayment Estimator. This pulls in information on your student loans to tell you what your payment will be under different plans.
What happens if I can’t pay my student loans?
If you’re really struggling to make student loan payments, especially due to a short-term financial crisis, you have the option to put off your loan payments entirely for a short period of time by putting it on deferment or forbearance.
If juggling a number of loans is your biggest struggle, consider consolidating all your loans into one single loan from a single lender through refinancing. The result is a single, more manageable monthly payment instead of multiple payments.