Options for Repaying Your Student Loans

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Options for Repaying Your Student Loans

Federal loans

If you have a federal loan, you have several options for paying it back.

Fixed payment repayment plans

These plans base your monthly payment on how much you owe, your interest rate, and a fixed repayment time period.

• The Standard Repayment Plan. The standard plan is the plan offered by the lender. The payments will last for as long as 10 years. This plan is the fastest method because it is shortest, but that also means higher monthly payments to make. An advantage to it is that you will pay less interest.
• The Graduated Repayment Plan. Under a graduated plan, your payments start out low and increase every two years. The repayment period lasts up to 10 years. An advantage to this plan is that it recognizes that your income will likely be lower right after you graduate and then (hopefully, at least) increase as the years accumulate.
• The Extended Repayment Plan. This plan allows a loan term up to 25 years, depending on the size of the loan. Your loan balance must be at least $30,000 in order to participate in this plan. Those who want to pay smaller monthly payments may find this plan to their liking because it is drawn out. A downside is that you will pay more interest over the course of the payback period.

Income-driven repayment (IDR) plans

These plans base your monthly payment on how much money you make and your family size.

• The Pay As You Earn (PAYE) Repayment Plan. You must have a partial financial hardship. Your payments will change as your income changes. Your monthly payments will be 10 percent of your discretionary income. If you have not repaid your loan in full after you made the equivalent of 20 years of qualifying monthly payments, any outstanding balance on your loan will be forgiven, though you may have to pay income tax on any amount that is forgiven.
• Saving on a Valuable Education (SAVE) Plan—formerly the REPAYE Plan. SAVE plans cap payments at 10% of your discretionary income. They offer loan forgiveness after 20 years or 25 years. Beginning in February 2024, the SAVE plan will give borrowers who originally borrowed $12,000 or less forgiveness after as few as 10 years. Note: parts of this plan are on hold due to a federal court injunction.
• The Income-Based Repayment Plan. The income-based plan recognizes that some graduates go through periods of low income. This option lets you pay an amount based on your income (10 or 15 percent of discretionary income), loan amount, and family size. It is refigured every year to reflect your income. If you pay on it faithfully for 20 or 25 years, you may qualify to have it cancelled.
• Income Contingent Repayment Plan. This option is only for federal Direct Loans, which are made directly by the federal government. With it, your payments can’t exceed a certain amount of your monthly discretionary income. Figuring your discretionary income involves subtracting an amount based on the poverty level from your gross income. If your payments are not sufficient to cover the interest portion, then any amount of interest not covered will be added to your loan principal. However, there are limits to this. The payment period is 25 years maximum. If you have not paid off your loan in this time, it will be canceled. But the IRS requires that you pay income tax on this canceled amount (in other words, the IRS will treat it as income).

Other federal plans

Income-Sensitive Repayment Plan. Your monthly payment is based on your yearly income, but your loan must be paid in full within 15 years. Payments will change as your income changes. Like other income-related plans, this one can be an advantage to those who are not earning much money in the early years after graduating.

You have the option of switching payment plans, usually once a year. But there are some regulations involved. And if you are in default, switching plans may not be allowed for you. More information can be found here.

School loans

If your loan (e.g., a Perkins loan) was issued to you by your school, there are repayment options for it. These options differ school by school, so consult yours for details.

Private loans

Repayment for private loans varies according to lender, but in general, you should expect fewer repayment options. Consult the lender to see what you qualify for.