What’s the best way to pay?

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Student loan borrowers have a variety of options when it comes time to start paying off their loans. Federal student loans offer the most flexibility, while the choices with private student loans are more limited. The best way to repay will depend on the type of loan you have, how much you owe, and your financial situation after you graduate. This guide explores your current choices.

Key points to remember

  • Federal and private student loans offer several repayment options, with federal loans offering the most flexibility.
  • Some repayment plans allow you to make smaller payments over a longer period of time, although that could mean paying more interest in total.
  • Many federal plans base your payments on your income.

Federal student loan repayment options

There are several repayment plans that you may be eligible for if you have federal student loans. Here is how they compare. A note: So far the civil service loan forgiveness program has rejected the majority of applicants, so be aware that choosing a repayment plan that is a good option for the program does not guarantee that your loans will be forgiven.

1. Standard repayment plan

  • Who is eligible: All borrowers.
  • How it works: Payments are fixed, with loans being repaid over a 10-year period.
  • Who it’s good for: Borrowers who wish to repay their loans as quickly as possible in order to minimize interest charges.
  • For whom it is not good: Borrowers interested in remitting civil service loans.

2. Progressive repayment plan

  • Who is eligible: All borrowers.
  • How it works: Payments start lower and then gradually increase, with loans being repaid in full over a 10-year period.
  • Who it’s good for: Borrowers who expect their income to increase over time and want to pay off their loans as quickly as possible.
  • For whom it is not good: Borrowers interested in remitting civil service loans.

3. Extended repayment plan

  • Who is eligible: All borrowers, although federal Direct loan borrowers and Federal Family Education Loans (FFELs) owe more than $ 30,000.
  • How it works: Payments can be fixed or progressive, with loans being repaid in full over a period of up to 25 years.
  • Who it’s good for: Borrowers who have larger loan balances and need a smaller monthly loan payment.
  • For whom it is not good: Borrowers who are interested in forgiving public service loans or who wish to pay as little interest as possible on their loans.

4. Pay As You Earn Reimbursement Plan (PAYE)

  • Who is eligible: Borrowers who received a direct loan disbursement as of October 1, 2011.
  • How it works: PAYE takes monthly payments at 10% discretionary income, but never exceeds what you would pay on a standard repayment plan.
  • Who it’s good for: People who need a low monthly payment and / or who are interested in the forgiveness of civil service loans.
  • For whom it is not good: Borrowers whose income fluctuates greatly from year to year.

5. Reimbursement plan revised as and when earnings (REPAYE)

  • Who is eligible: Any Direct Loan borrower with an eligible loan. Parent PLUS loans, for example, are not eligible.
  • How it works: Your monthly payments are set at 10% of your discretionary income.
  • Who it’s good for: Direct loan borrowers who need a low monthly payment and don’t mind paying more interest over the life of the loan compared to a standard repayment plan. Also those interested in the forgiveness of civil service loans.
  • For whom it is not good: Married couples who file a joint return and have a higher combined income.

6. Income Based Repayment Plan (IBR)

  • Who is eligible: Borrowers with Subsidized and Unsubsidized Direct Loans, Federal Stafford Subsidized and Unsubsidized Loans, Student PLUS Loans, and Consolidation Loans, but no PLUS parent loans. Borrowers must also have high debt relative to their income.
  • How it works: Monthly payments are either 10% or 15% of discretionary income, depending on when you borrowed, but never more than what you would pay with a standard 10-year repayment plan. After 20 or 25 years of installments, you will be eligible for the civil service loan forgiveness.
  • Who it’s good for: People with high debt balances who need lower monthly payments due to lower income, as well as anyone interested in forgiving civil service loans.
  • For whom it is not good: Borrowers who can afford to spend more than 10% or 15% of their income on repayment each month and pay off their loan faster.

7. Income-Based Repayment Plan (ICR)

  • Who is eligible: Any Direct Loan borrower with an eligible loan. Parent PLUS loans, for example, are not eligible.
  • How it works: Monthly payments are 20% of discretionary income or the amount you would pay over 12 years with a fixed payment based on your income, whichever is less.
  • Who it’s good for: Borrowers who can afford to spend more of their monthly income on loan repayment, but not the amount required by a standard repayment plan. Also those who are interested in the delivery of civil service loans.
  • For whom it is not good: Borrowers who owe something other than direct loans or married couples who file jointly and are in a higher tax bracket.

8. Income-based repayment plan

  • Who is eligible: Federal Family Education Loan borrowers.
  • How it works: Monthly payments are based on annual income, with loans being repaid in full over 15 years.
  • Who it’s good for: FFEL borrowers who want a lower monthly payment than they would get with a standard or progressive repayment plan.
  • For whom it is not good: Borrowers interested in remitting civil service loans.

The Department of Education suspended interest and monthly payments on student loans held by the federal government until January 31, 2022. The US bailout package passed by Congress and signed by President Biden in March 2021 also includes a provision that the student loan forgiveness issued between January 1, 2021 and December 31, 2025, will not be taxable to the beneficiary.

Which Federal Student Loan Repayment Option Is Best?

The answer to this question may be different for each borrower. “Student loan repayment is not universal, but the majority of people are just trying to pay off their debt normally,” said Shann Grewal, vice president of IonTuition. “When borrowers aren’t looking for a repayment plan that best suits their situation, it has disproportionate impacts.”

Your choice of plan can affect other financial decisions you make. If you commit, for example, to a standard 10-year repayment plan based on the salary you earn at your first job after college, it could influence your future career path if you decide to stay put until that the loans are repaid. Your loans can be canceled, but in the meantime you might miss out on opportunities to increase your salary or advance professionally.

It’s also important to keep income-driven repayment plans and their usefulness in perspective. Choosing an income-based repayment plan can depend on several factors, including what you earn now and your future income potential.

“Some students will immediately enter the workforce with a well-paying job, while others will have to progress,” said Lena Chukhno, general manager of student loan refinancing at Earnest. Other variables that come into play include the amount of debt and whether you plan to go back to school for a graduate degree at some point.

Chukhno says it’s important to consider long-term goals when choosing a student loan repayment plan. “You can always refinance your loan down the line if things change, but it’s best to start on the right note so you don’t have financial problems. ”

Eligibility for the PAYE, REPAYE, IBR and ICR reimbursement plans is not guaranteed from year to year. Your eligibility and your payment amounts are recalculated each year, based on your household income and family size.

Private student loan repayment options

Private student loans generally offer less choice for borrowers. These include:

  • Immediate refund: Principal and interest payments begin as soon as your loan is disbursed.
  • Interest payments only: You make interest payments only while you are in school, and then you start paying principal and interest after you graduate or are no longer enrolled part-time.
  • Fixed payments: You pay a small, fixed amount while in school and then start making larger regular payments once you drop out of school or fall below part-time enrollment status.
  • Full adjournment: You pay nothing while you’re enrolled in school and start paying interest and principal within a specified time after leaving school.

Depending on your lender, you may be eligible for a deferment or forbearance period if you are unable to meet your regular loan payments. But this usually requires financial hardship and is not offered by all lenders.

If you have private student loans, it’s important to do the math to find out what the various repayment options will cost you in interest over the life of the loan. You may also want to consider refinancing your private loans if this allows you to qualify for a lower interest rate. This can save you money on interest during the repayment term. Refinancing a student loan usually involves a credit check, so if you don’t yet have a strong credit history, you may need a co-signer to qualify. Finally, if you’re having trouble managing your monthly payments, contact your lender as soon as you can and see what can be worked out.

The bottom line

If you have student debt, take the time to learn about your repayment options. Ideally, this is something you do before graduation so that you have an idea of ​​what repayment plan you want to start with. If you choose an income-driven plan, reassess your finances annually to see if another repayment option might be better at saving money on interest charges.


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