The federal government offers federal student loan borrowers several repayment plans to choose from. Each one of these plans can affect both, your monthly payment amount as well as the total cost of the loan. Comparing student loan repayment plans can help you choose the best plan for your financial circumstances and long term goals.
Standard Repayment Plan
Standard repayment is the default plan for federal student loans. When you apply for a federal student loan, it automatically processes under this plan unless you specifically choose a different plan.
The standard repayment plan allows you to pay your loan over a period of 10 years. The payments are divided into 120 equal installments over the 10 years. This means you pay the same amount every month for 10 years until the debt is completely cleared.
The biggest benefit of the standard repayment plan is that you pay less interest on the loan over the loan term than you would under other plans. This is because you start paying down the principal balance at the outset. Also, you’ll pay off your loans in the shortest amount of time if you made all payments on time.
All Federal Direct Loan Program Loans and Federal Family Education Loans are eligible for the standard repayment plan.
Graduated Repayment Plan
The graduated repayment plan allows you to start making low payments, which increase over a period of time, usually every two years. This option is great for loan borrowers entering careers where salaries are low at the beginning but increase over time.
This plan is a compromise between standard repayment and extended repayment. By the time you’ve paid off the loan, you’ll pay more in interest than under the 10-year standard repayment plan. But, you’ll pay less in interest than under the extended repayment plan.
The graduated payment plan is a good option for anyone who expects their income to increase over a period of time.
All Federal Direct Loan Program Loans and Federal Family Education Loans are eligible for the graduated repayment plan.
Extended Repayment Plan
The extended repayment plan extends the payments for up to 25 years. This helps to lower the monthly payments. The payments are either fixed or graduated, where they increase over time. Only borrowers with more than $30,000 in federal student loans in a single loan program can opt for this repayment plan.
While it does help to lower the monthly payments and make them more affordable, an extended repayment plan increases the lifetime cost of the loan. This is because of the higher interest accrual over the longer loan term.
This repayment plan is a good option for anyone looking to make their monthly payments more affordable.
All Federal Direct Loan Program Loans and all Federal Family Education Loans taken after October 7, 1998 are eligible for the extended repayment plan.
Income-Based Repayment Plan (IBR)
The income-based repayment plan base your payments on your income. It calculates your payments as 15% of the difference between your adjusted gross income and 150% of the poverty level for your state and family size. Your loan repayments will change with your income.
Under an income-based repayment plan, there are two loan terms – up to 20 year (for new borrowers) or 25 years. While the plan makes the monthly payments more affordable, it increases the cost of the loan because of the higher interest accrual.
Income-based repayment is a good option for you if you don’t have a steady job and your income constantly. By calculating the monthly repayments as a percentage of income, the payments will always be affordable no matter how low your income.
All Federal Direct Loan Program Loans and Federal Family Education Loans, except Parent PLUS Loans are eligible for income-based repayment plan. You qualify for this plan only if your calculated monthly payments are lower than your payments under a standard repayment plan.
A unique aspect of this plan is that any outstanding balance will be forgiven if you have not repaid the full debt after having made the equivalent of 25 years of qualifying monthly payments. If you’re a new borrower, the unpaid balance will be forgiven after 20 years of qualifying monthly payments. You are liable to pay income tax on the forgiven amount.
How To Choose The Right Repayment Plan For You
There is no one repayment plan that is right for all federal student loan borrowers. The right repayment plan for you depends on your current circumstances and your long-term financial goals. Before you sign up for a federal student loan, take time to compare repayment plans and pros and cons. This will help you choose one that works best for you.
- Opt for the default standard repayment plan if you can afford the higher monthly payments. Not only will you save on the lifetime cost of the loan but you’ll also pay off your debt in the shortest time possible.
- Choose the graduated repayment plan if you’re employed in a low-income role but foresee your income increasing over time.
- The extended repayment plan can help if you need to lower your monthly payments to make them more affordable. Be aware though that this you’ll end up paying more in interest over the longer term.
- Choose an income-based repayment plan if you don’t have a steady job or you’re self-employed and your income changes. Under this plan, no matter what your income, the payments will always be affordable.