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Federal student loans come with a number of flexible repayment plans — eight, to be exact. Unless you choose an alternative plan, your loans will automatically go on the standard 10-year plan, which will get you out of debt the fastest. But if you need more affordable payments, you could opt for an alternative plan, such as income-driven repayment. Let’s take a closer look at all your options for federal student loan repayment plans, along with the pros and cons of each one.
- 8 federal student loan repayment plan options
- Which federal student loan repayment plan is best for you?
8 federal student loan repayment plan options
The government offers a variety of federal student loan repayment plans, so you have flexibility if you need to adjust your monthly payments or get an extension on your student loans. Note that you can always make extra payments on any of these plans without penalty if you want to pay off your loan faster and save on interest.
1. Standard repayment plan
Unless you choose an alternative plan, your loans will automatically go on the standard 10-year plan. This plan involves fixed payments each month that stay the same over the life of your loan. On this plan, you will pay off your debt in 10 years.
Let’s look at an example. Let’s say you owe $35,000 in student loans at a 5.05% interest rate. On the 10-year plan, your monthly payments would be $372. Over 10 years of repayment, you’d pay $9,650 in interest.
Pros:
- Payments stay the same over the life of your loan
- You don’t have to apply for this plan; your loans will go on it automatically
- Interest costs will be less than they would be on other plans
Cons:
- Monthly payments are likely higher than they would be on other federal student loan repayment plans
2. Graduated repayment plan
The graduated repayment plan is the other federal student loan repayment plan that spans 10 years. Similar to the standard plan, you’ll get out of debt after 10 years of payment.
The only exception is if you have a consolidation loan. Then, your repayment term will be between 10 and 30 years, depending on how much you owe.
Unlike the standard plan, your payments won’t be fixed during this time period. Instead, they’ll start out low and increase every two years.
This graduated approach can be useful if your budget is tight right now but you expect to be making more money in the future. That said, it could result in higher interest costs than the standard plan, since your initial payments will be so small.
Note that your bills on this plan won’t increase indefinitely; rather, they’ll never be higher than three times your original payment. So if your original payment is $100, your final payments won’t be higher than $300.
Pros:
- Your initial payments will start low, which could be easier to manage if you’re job searching or have a low salary.
- You’ll still get out of debt in 10 years, unless you have a consolidation loan.
Cons:
- You’ll pay more interest than you would on the standard plan. In some cases, your initial payments only cover interest charges and don’t make a dent in your principal amount.
3. Extended repayment plan
If you want to lower monthly payments, you can opt for the extended repayment plan. This plan spans 25 years.
Because it’s so long, your monthly payments will be lower. But you’ll end up paying a lot more interest overall.
Let’s go back to that example of a $35,000 loan at a 5.05% rate. On the extended plan, you’ll pay $206 per month ($166 less than the standard plan), but your total interest charges will be $26,688 ($17,038 more than the standard plan).
On extended repayment, you can opt for fixed or graduated payments. For most borrowers, though, an income-driven repayment plan is preferable to the extended repayment plan.
Pros:
- Lowers your monthly payment
- Gives you up to 25 years to pay back your debt
Cons:
- Increases your interest costs substantially
- Does not end in loan forgiveness like an income-driven repayment plan
- Payments on this plan do not count toward Public Service Loan Forgiveness (PSLF)
4. Income-Based Repayment
Income-Based Repayment (IBR) is one of four income-driven repayment plans for federal student loans. Depending on when you borrowed, this plan,
- Adjusts your monthly payments to 10% or 15% of your discretionary income
- Extends your loan terms to 20 or 25 years
- Offers loan forgiveness if you still have a balance at the end of your repayment term
To qualify for this plan, you need to have financial need. Essentially, you need to show that your payment on IBR are lower than what they would be on the standard 10-year plan.
Most federal student loans are eligible for IBR except for parent loans or consolidation loans that contain parent loans.
Pros:
- Adjusts your monthly payments in accordance with your income
- Offers loan forgiveness at the end of your repayment term
- Doesn’t include spouse’s income when calculating your monthly payment if you file taxes separately
- Covers 100% of interest on subsidized loans for first three years
- Payments on this plan are eligible for PSLF
Cons:
- You’ll pay more interest with a longer term
- Parent borrowers probably won’t qualify
- Any loan forgiveness you receive from an income-driven plan is treated as taxable income
5. Pay As You Earn
Pay As You Earn (PAYE) is another income-driven repayment plan that adjusts your payments along with your income. Specifically, it
- Adjusts your monthly payments to 10% of your discretionary income
- Extends your loan terms to 10 years
Like IBR, PAYE will forgive any remaining balance at the end of your term.
While you don’t have to show financial need to qualify, you do have to be a new borrower as Oct. 1, 2007 and have received a Direct loan on or after Oct. 1, 2011.
Pros:
- Has one of the lowest payment amounts (10%) and shortest repayment terms (20 years) of any income-driven plan
- Offers loan forgiveness at the end of your term
- Only takes one spouse’s income into account if you file separately
- Covers the interest on your subsidized loans for the first three years
- Is a qualifying repayment plan for PSLF
Cons:
- Extended term means higher interest costs
- Older borrowers aren’t eligible
- Parent borrowers probably won’t qualify
- Any forgiven amount is considered taxable income
6. Revised Pay As You Earn
A third option for income-driven repayment is the Revised Pay As You Earn (REPAYE) plan. On REPAYE, you’ll have,
- Payments set at 10% of your discretionary income
- Repayment terms of 20 years for undergraduate loans and 25 years for graduate loans
For REPAYE, it doesn’t matter when you borrowed, but parent loans aren’t eligible.
Pros:
- Adjusts your payments to 10% of your income
- Offers loan forgiveness after 20 or 25 years of on-time repayment
- Is a qualifying repayment plan for PSLF
- Has an interest subsidy that covers 100% of interest on subsidized loans for three years and 50% after three years, as well as 50% of interest on unsubsidized loans throughout your repayment period
Cons:
- Sets a longer repayment term of 25 years if you have loans from graduate school
- Always takes both spouse’s incomes into account when calculating your student loan payment, even if you file separately
- Treats any forgiven amount as taxable income
7. Income-Contingent Repayment
Finally, you might be interested in the Income-Contingent Repayment (ICR) plan. While its terms aren’t as appealing as the other income-driven plans, it’s the only one that’s available for parent loans.
ICR,
- Sets your student loan payments at 20% of your discretionary income or the amount you’d pay on a 12-year fixed plan, whichever is lower
- Extends your loan terms to 25 years
If you have parent loans and want to adjust your payments, the ICR plan is your best bet. But if you have other student loans, another income-driven repayment plan probably has better terms.
Pros:
- Is the only income-driven plan for which parent loans are eligible
- Only considers one income if you and your spouse file separately
- Is a qualifying repayment plan for PSLF
- Forgives your remaining balance after 25 years of on-time payments
Cons:
- Has a higher monthly payment and longer repayment term than some other plans
- Doesn’t have an interest subsidy, unlike the other income-driven plans
- Treats any forgiven amount as taxable income
8. Income-Sensitive Repayment
Finally, the government offers the Income-Sensitive Repayment plan for low-income borrowers with FFEL loans. The FFEL program stopped originating new loans in 2010, so this plan isn’t an option for more recent borrowers.
But if you have FFEL loans, Income-Sensitive Repayment could adjust your payments based on your income while keeping your student loan term at 10 years. But it might not be available for your entire repayment term.
If you’re interested in making your FFEL payments more affordable, speak with your loan servicer about whether the Income-Sensitive Repayment plan could be helpful for you.
Which federal student loan repayment plan is best for you?
The right federal student loan repayment plan all depends on your budget and goals.
- If you can afford the standard payments…go with the standard 10-year plan to avoid lengthening your terms or increasing your interest costs.
- If you want lower monthly payments now but expect your income to increase in the future…consider graduated repayment, but be aware that it could increase your interest costs.
- If you want to make your monthly payments more affordable…opt for an income-driven repayment plan. These plans tend to be superior to extended repayment, since they could lead to loan forgiveness and most offer an interest subsidy.
- If you’re working toward PSLF…put your loans on income-driven repayment. This will ensure that your payments qualify for loan forgiveness (if you stayed on the standard plan, you wouldn’t have any debt left to forgive after 10 years).
Federal Student Aid has a useful tool called the Loan Simulator which can help you compare your terms on different repayment plans. You could also use an online student loan calculator to compare terms, or speak with your loan servicer for guidance.
And if you can afford to pay more toward your loans, consider making extra payments. Just make sure to instruct your loan servicer to apply the extra payments toward your principal amount, rather than toward your interest or a future payment.
By taking this approach, you could shave years off your repayment period and save hundreds or even thousands of dollars on interest. Head to this guide for foolproof strategies on how to repay your student loans ahead of schedule.
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