It’s been 6 months since you graduated from your degree program, or even just decided to take a break from classes for a while. When you check your email inbox or your mailbox, you get a bill from your student loan holder. It’s then that you realize that now it’s the time to start paying back those loans you took out. Student loans take up a huge amount of debt in your lifetime, and if you’re anything like me, it has added up fast. But did you know that there are different options for repaying your student loans?
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There are actually EIGHT options for repaying your student loans. It took me a while to figure that out, and to figure out which was best-suited to my life and my future goals. As someone who has a huge student loan balance, I had to carefully weigh my options to see how much I could afford to pay and how long I truly wanted to pay for.
But with so many options, it is easy to get overwhelmed and choose one at random. That’s not a good idea.
That is exactly why I decided to write this post. As I sat there and read through all of the repayment options, I got a bit lost and definitely overwhelmed. It’s easy to do. So I’m going to break down each option for you in an easy to understand guide. Make the right choice for your life and finances without getting lost in all of the terms and options.
What are my student loan repayment options?
Because throwing them all at you at once will just be too much, I’m going to break each option down for you one at a time. And don’t ever hesitate to reach out and ask questions. I’ve done a lot of research on student loans and repayment options. If I don’t have an answer, I’ll help you find an answer.
Student loan repayment options come in aggressive forms, taking you the least time to pay off but costing you more each month. If your budget can fit that, go that route. None of us want to spend the next 10 or more years paying off student loans.
They also come in more income-based plans. They will take into account your income and your budget and help you find a monthly payment that you can handle.
So let’s dive into the different student loan repayment plans.
Standard Repayment Plan
Exactly how it sounds. This is the plan each student is automatically enrolled in. It is available for Direct Subsidized and Unsubsidized loans, Federal Subsidized and Unsubsidized loans, PLUS loans and consolidation loans.
With the standard repayment plan, you’ll pay the least amount over time because you’re making higher monthly payments. This means that you’re paying less interest.
BUT with this plan, you are ineligible for any student loan forgiveness plans. Because the standard repayment plan is set up so that in 10 years your loans are fully paid. So if you are a federal or state employee, you are going to want to look at different student loan repayment plans.
The standard repayment plan takes your total loan balance, and breaks it up over 10 years with your monthly payment solely based on the amount you owe. No income or personal information is taken into account.
My suggestion is to only choose this option if you’ve started in your career and are financially stable. That is, of course, unless your loan balance is small and the payments are very affordable.
Graduated Repayment Plan
Okay, here’s where it starts to get confusing. Again, this student loan repayment plan is set up to only consider your loan balance. It also, just as the standard plan, allows for your loan to be paid off in 10 years. Although it is 10 to 30 years if you have a consolidated loan.
The big difference between the graduated repayment plan and the standard repayment plan is the monthly payment. When you first start making payments with this plan, your payments will be lower. And every couple of years, the monthly payment will increase. Over time, this ensures that your loans are paid within the 10 year period.
Again, this is an option for those who have begun their career and have some financial stability.
This plan is also generally not allowed for those seeking student loan forgiveness options. Because of the fact that your loans are paid off in the 10 year time frame.
Extended Repayment Plan
Here is where we start to explore the payment options with lower monthly payments. The biggest downfall to this payment plan is that you will end up paying a significantly higher amount in interest.
The extended repayment plan is set up so that your loan is paid off in a period of up to 25 years. Your payments are based on your total loan balance. But here’s the catch, you can choose to have fixed payments or graduated payments.
So basically, this plan combines the standard and graduated options, but gives you the option of lower payments for a longer period of time.
Between the 3, if I had to choose one this would be my first choice. Only because I have a large student loan balance, and I know that with the standard or graduated plan I would not be able to afford my payments.
A Couple of Things to Be Mindful Of
- For Direct or FFEL borrowers, your loan balance must be over $30,000.
- You will pay more in interest on your loans.
- This plan is not eligible for the PSLF program. (Public Service Loan Forgiveness Program)
Pay As You Earn Repayment Plan
This payment plan sounds a lot like the remaining options, and it can be confusing when trying to compare the 5 options that take into account your income. The pay as you earn repayment plan is only eligible towards Direct Subsidized and Unsubsidized loans and PLUS loans made to students. It is not eligible for PLUS loans made to parents.
Here is where this plan is a bit tricky. You have to be considered a new borrower. This means that you cannot have had a loan before October of 2007. And you have to have a loan disbursed after October 2011.
This payment plan will only apply to Direct loans. It includes Direct Subsidized and Unsubsidized, Direct PLUS loans made to students, and Direct Consolidated loans.
This plan is eligible for outside student loan forgiveness programs such as the PSLF program. But you may have to pay tax on any forgiven loan amount.
How does it work?
With this student loan repayment plan, you have to submit income and household information. It uses your discretionary income to calculate your monthly payments.
What is discretionary income?
Glad you asked.
Discretionary income is whatever the difference is between your annual income and 150% of the poverty level for your family size.
So for example, your family size includes yourself, your significant other (not married), and your 2 children. Your current annual income is $25,000. Because you are unmarried, your significant other’s income is not considered.
The 150% poverty level for a family size of 4 is $37,650. The difference between the poverty level and your income is $12,650.
10% of the difference is $1265. Now divide that by 12 and you’ll get your monthly payment. Which would be $105.42.
If the payment calculated using your discretionary income is more than what you would have paid with the standard payment plan, they will not charge you the higher payment amount.
See how it can get confusing?!?
With the pay as you earn repayment plan, your payment is recalculated yearly. So you’ll have to submit income and family information on a yearly basis. If you are married, your spouse’s income is only included if you file your taxes jointly.
If after 20 years, your loan has not been paid in full, the remaining balance will be forgiven. But you have to have made consecutive on-time payments in order to be eligible. So don’t skip a payment!
Revised Pay As You Earn Repayment Plan
The revised pay as you earn repayment plan is very similar to the pay as you earn repayment plan. And because you just powered through and read the entire description, I won’t bore you with the same details. I’m going to tell you what is different between this and the pay as you earn plan.
Again, your payment is calculated based on 10% of your discretionary income. And it only includes Direct loans paid out to the student. It does not include Direct PLUS loans made to parents.
The Big Differences
- If you are married, your spouse’s income will be considered, no matter how you file your taxes. This can mean a huge difference in monthly payments depending on your income.
- The loan forgiveness periods are a bit different. If all of your loans have gone to undergraduate studies, your loan balance will be forgiven after 20 years of consecutive, on-time payments. If some of your loans have gone to graduate studies, you have to make 25 years of consecutive, on-time payments.
Income-Based Repayment Plan
Okay guys, I know you’re getting tired but we are so close to the end. And I know that you want to choose the best option for your life.
For those of you with less income than you’d hoped after graduation, this may be a really great option for you. All Direct Subsidized and Unsubsidized, Federal Stafford Subsidized and Unsubsidized, Student PLUS loans, and Direct Consolidated loans are included in the income-based repayment plan.
It does allow eligibility for loan forgiveness, including in PSLF programs.
And it is still based on your income. You will have to submit income information annually, as well as family size and any household changes.
As with the pay as you earn plan, your spouse’s income is only considered if you file taxes jointly.
The difference with this plan, is that dependent on when you received your loans, your payment is based off of 10-15% of your discretionary income. And also dependent on when your loans were received, your loan balance will be forgiven after 20-25 years of consecutive, on-time payments.
Just remember, for any balance forgiven, you may have to pay taxes on the forgiven amount.
Income-Contingent Repayment Plan
Okay, onto the income-contingent repayment plan. This isn’t necessarily my favorite. And your payments will end up being a bit higher than some of the other plans. But it is still a plan that considers your income and family size.
You are only eligible for this plan if you hold Direct loans. So that includes Direct Subsidized and Unsubsidized, Direct PLUS (made to students) and Direct Consolidated loans. But, parents who have taken out parent PLUS loans can utilize this repayment plan as long as they consolidate into a Direct Consolidated loan.
There is a small downfall to this loan repayment plan though. For those with lower incomes, this plan considers 20% of your discretionary income, or the amount you’d pay on a 12-year fixed payment plan. So the monthly payment is going to be significantly higher. Not always a downfall, as long as your budget has room for this type of payment.
Your income should be updated yearly. With this student loan repayment plan, your spouse’s income is considered either if you file taxes jointly, or if you choose to repay loans directly with your spouse.
With the income-contingent plan you are still eligible for loan forgiveness. It includes PSLF programs as well. In order to be eligible, you must make 25 years of consecutive, on-time payments before becoming eligible. As with the other loan options, the forgiven balance may be subject to tax.
Income-Sensitive Repayment Plan
The income-sensitive repayment plan is another option that utilizes your income to determine your monthly payment. But with this plan, your monthly payment is based on a 15-year fixed rate. Meaning that your loan will be paid off in 15 years. This makes you ineligible for student loan forgiveness programs.
The only loans that are eligible for this plan include Federal Stafford Subsidized or Unsubsidized loans, FFEL PLUS loans, and FFEL Consolidation loans.
Your monthly payment is determined by your annual income, the balance of your loan, and will be broken up into 15 years of monthly payments.
The payment calculation varies between lenders so I unfortunately cannot give you percentages for determination.
I hope I didn’t get you too confused by all of this information. And quite honestly I could have broken it up into multiple posts. But I wanted to give you the information side-by-side so that you are best able to compare the plans. I know that paying student loans off is not something we really want to think about. But if we take control of our payment options, the process will be a lot less stressful.
I hope that you were able to find the student loan repayment plan that fits your life best. And as always, feel free to reach out with any questions you might have. 😀