A vast number of Americans have student debt, with recent estimates putting the figure at around 44.7 million people. That’s one in every five adults in the country with loans that need paying back. Having student debt is nothing to be concerned about, as it is perfectly normal. You do have to make some considerations about how you are going to pay the money back, though.
There are numerous student loans repayment plans which are designed to fit with a vast range of diverse needs. By choosing the right plan, the debt can always be dealt with in a manageable way.
Here is everything you need to know about the different repayment plans, and some advice about which one might be best for you.
Types of Plans You Can Choose From
There are two main ways to pay back student debt, and each of these can be broken down into a few different options. These are:
- Federal student loan repayments
- Income-driven repayment plans for federal student loans
This section will provide you with a detailed breakdown of these options and the various methods that people with student debt have to pay the loans back.
Federal Student Loan Repayment Plans
Each of the other federal student loan repayment plans has a lower monthly repayment than the Standard Repayment Plan, but there is a caveat to this. With these options, the length of the loan is extended and the total amount of interest increases over time. This means that people pay less in the short term but more over the long term.
The three different options available are listed below.
- Standard repayment plan
- Graduate repayment plan
- Extended repayment plan
Standard Repayment Plan
This has a minimum repayment of $50 per month, and the person in debt will pay a fixed monthly sum for up to ten years. Depending on the size of the loan, the repayment period for this could be shorter than that timeframe. This is the plan that everyone will find themselves on if they don’t make arrangements for a different plan that better suits their needs. It is good in that the loans can be paid back over a short amount of time, but the monthly repayments may be quite high for some people.
Graduate Repayment Plan
This plan takes into account the fact that a lot of people who have student debt are just getting out of college and trying to find their feet in the working world. With this in mind, the repayments on this plan start off small and gradually get higher as ex-students start to earn more money.
These payments increase every two years, and the loan term can last between 12 and 30 years. This time period depends on the size of the loan. For this plan, the monthly payment can be no less than 50% and no more than 150% of the monthly repayment stipulated in the Standard Repayment Plan.
In addition to this, the monthly payment should be at least the interest accrued and higher than $25.
This scheme takes into account that most careers offer their employees the chance to earn annual salary increases. So the repayments are relative to what you are earning.
Extended Repayment Plan
An extended repayment plan is similar to the Standard Repayment Plan, but the length of time given to repay the loan is much longer. This term is usually somewhere between 12 and 30 years. This is an option for people who want to have lower monthly repayments but, like the graduate repayment plan, the overall amount of money paid back is higher than it would be from the Standard Repayment Plan. This is because the interest on the loan increases over this period of time.
Income-Driven Repayment Plans for Federal Student Loans
If the federal student loan repayment plans don’t suit your needs, you could look at some of the income-driven repayment plans for federal student loans. These plans are more dependent on the amount of money you are earning, so they can be useful options for people who may go through a number of different jobs after they finish college.
The options for this type of repayment plan are:
- Income-based repayment plan
- Income-contingent repayment plan
- Income sensitive repayment plan
- Revised as you earn repayment plan
- Pay as you earn repayment plan
Income-based Repayment Plan
The income-based repayment plan is a popular option for graduates, because it sets the monthly loan repayments at a 10% of your monthly income. This figure is for new borrowers who have borrowed on or after July 1 2014.
The previous rate was 15%.
It should be noted that this percentage is never more than the Standard Repayment Plan. The period for this plan is 25 years.
The IBR plan is considered to be good for new borrowers who have high balances but want a lower monthly repayment. The good thing about this is there is loan forgiveness at the end of the repayment period, and if your salary decreases the monthly installments will also decrease.
One of the downsides of this plan is the fact that you have to submit your salary information each year to stay on it. Otherwise, your monthly amount would revert to the amount it would be under the Standard Repayment Plan.
This would be calculated based on a ten year repayment schedule, so the installments could end up being significantly higher than what you had been paying previously.
Income-contingent Repayment Plan
The income-contingent repayment plan has a payback period of 25 years, and sets the monthly instalments at under 20% of your discretionary income.
This option is preferable for people looking for lower monthly repayments paid over a longer period of time.
However, it should be noted that it isn’t available to everyone. Only people with FFEL loans can apply for this plan.
This is a good option for people who are seeking public service loan forgiveness, and it is also popular among families. This is because, depending on income and family size, the monthly payment may be lower than it would be on the Standard Repayment Plan.
The problem with it is the fact that the 25 year repayment period means that you end up paying a lot more interest than you would on plans that are set over a shorter time period. Additionally, like the IBR, you need to recertify your income annually. Failure to do so puts you on a much higher monthly repayment schedule.
Income Sensitive Repayment Plan
Like the income-contingent repayment plan, the income sensitive repayment plan is for borrowers who have Federal Family Education Loans. This one has a much shorter repayment period of ten years, though, and the monthly repayments are based on annual income.
One of the best things about this plan is the fact that the amount of interest accrued is much less than plans that have longer terms. It is also good that the monthly payments decrease if your income ends up decreasing for any reason.
The downside to this plan is the fact that your monthly payments will increase if your income increases. If this ends up being the case, there are perhaps better plans more suited to people earning more money.
For this reason, this plan is only best if you know that you are going to be staying in a low income job for a lengthy period of time.
Revised as you Earn Repayment Plan
The revised as you earn repayment plan, otherwise known as REPAYE, has monthly repayments of 10% of your salary. The term of repayment for this one is 20 years if only covering loans taken out during undergraduate studies. For loans taken out during graduate studies, the repayment period is 25 years. There is no cap on the monthly repayments with this plan, so they could end up being higher than the Standard Repayment Plan.
This type of plan is recommended for people with large debts to pay back but who only have a modest income. For high balances, some of the interest that builds up may be paid by the government if you are unable to cover the interest in your monthly payment.
The good thing about this type of repayment plan is the fact that it is available to anyone with a federal loan. The monthly payment may end up being lower than the Standard Repayment Plan, depending on your family size and income.
The downsides to this option are that the long repayment period means that the interest can reach high levels, and it also requires you to recertify your income and family size every year.
Failure to do this will result in being removed from the plan, and could mean that you will have to pay a much higher monthly rate.
Pay as you Earn Repayment Plan
The final repayment plan option on this list is the pay as you earn repayment plan, which is also known as PAYE. This option is similar to the revised as you earn payment plan listed above, with the main difference being that if your income increases greatly in value, the monthly payments will still be capped at the Standard Repayment Plan Level.
For this plan, the monthly payment is 10% of your discretionary salary paid over the course of twenty years.
The benefits of this plan are that the monthly repayments are lower than they would be on the Standard Repayment Plan and, if your income gets to a stage where your repayments would be higher than this, you move to the Standard Repayment Plan installments.
The main problem with this is the fact that with the repayment schedule lasting over 20 years, the interest accrued will be much higher than it would be on the Standard Repayment Plan.
In addition to this, it is only open to new borrowers whose monthly payments are lower than they would be on the Standard Repayment Plan.
Can I Switch Repayment Plans?
Switching repayment plans is an option, but you can only do it once every year. This can be done if the maximum loan term for the new plan is longer than the amount of time your loans have already been in repayment.
You should also be aware that you could potentially switch plans involuntarily. If you are on a plan which requires you to declare your income and family size each year and fail to do so, you will be moved onto the Standard Repayment Plan.
Compare Repayment Plans
With so many different plans to choose from, it may seem like a lot of information to take in. The main thing to note is that each plan provides a different timeframe for repayment of the loans. In addition to that, the monthly payments are equal to varying percentages of your annual salary.
To help you understand just how much of an effect the number of years has on the interest of the loan, take a look at the table below. This table is based on the unsubsidized Stafford Loan interest rate of 6.8%.
|Repayment Plan and Loan term||Reduction in Monthly Payment||Increase in Total Interest Paid|
|Extended Repayment – 12 Years||12%||22%|
|Extended Repayment – 15 Years||23%||57%|
|Extended Repayment – 20 Years||34%||118%|
|Extended Repayment – 25 Years||40%||184%|
|Extended Repayment – 30 Years||43%||254%|
50% Initial Payment
38% Average Reduction
|Income Contingent Repayment where Salary is Equal to Initial Debt|
41% Declining to 33%
37% Average Reduction
As you can see from the table, extending the loan can lead to some seriously big hikes in the interest accrued on the total debt.
This means that the monthly payments will be lower, but the overall amount paid will be much higher. For higher earners, it makes more sense to go for the plans with the shortest repayment terms.
Those with lower incomes are more likely to spread the debt repayments over a greater number of years.
What Other Options Do You Have?
Aside from the various repayment plans, the other options that you have are consolidation or refinancing your loans. Consolidation is where you bundle multiple federal loans into one through the federal government. This can sometimes give you more access to more favorable repayment plans. There may even be the option to access forgiveness programs.
Refinancing your student loans would mean going through a private vendor, and this may mean that you lose the federal loan benefits.
Paying off student debt is something that a great number of Americans have to deal with. There is no way of avoiding it, so you need to make sure that you are on the right plan to suit your needs.
Don’t forget that the longer the loan term is, the more you will end up paying over the long term. It does mean that your monthly repayments are much lower.