The Complete Guide to Federal Student Loan Repayment
If you have federal student loans, you’re in luck. Well, as much luck as you can have with student loan debt. The good news is that federal loans offer various student loan repayment options for borrowers after they graduate, so you’re not just stuck with one payment plan.
If you don’t choose a plan after you graduate and start paying back your loans, you’ll automatically be enrolled in the Standard Repayment Plan, which is the 10-year repayment plan. But you have more options than that and if you just graduated, you want to know what they are.
Here’s a breakdown of federal student loan repayment options:
Standard Repayment Plan
As mentioned above, this is the plan you’ll be enrolled in automatically, if you don’t choose a plan. Through the Standard Repayment Plan, you’ll have 10 years to pay off your student loans. Payments are a fixed amount of at least $50 per month.
This is the best option if you can afford it, as you’ll save money on interest. It’s also important to note that you can pay more than your fixed payments and get out of debt in less than ten years. One mistake I made when I first graduated was looking at my student loans as a bill, and paying what I was told to pay. I could have shaved a few years off of my student loan repayment by paying more than the minimum. Federal student loans do not have prepayment penalties.
Graduated Repayment Plan
Through the Graduated Repayment Plan, your initial payments will start out small and gradually increase over time, generally every two years. The thinking behind this is that as time goes by, your income will go up, and you can afford larger payments.
Because your payments start out small, you’ll end up paying more for your loan than if you had chosen the Standard Repayment Plan. This plan also has a ten-year repayment period. However, this may be a good option if your income is low now, but you are expecting wage increases in the future.
Extended Repayment Plan
If you have six-figure debt and your monthly payments are outrageous, you may want to consider the Extended Repayment Plan, which allows you to pay back your loans within 25 years. Your payments can be fixed, meaning they stay the same, or graduated, meaning they will increase over time.
To qualify for this plan, you must have more than $30,000 in outstanding loans. Under this plan, your payments will be much lower and spread out. The downside? You may end up paying nearly double your initial balance because of the additional interest. I don’t recommend this plan, unless you really need it.
Income-Based Repayment (IBR)
If you’re currently struggling to get by, Income-Based Repayment can be a godsend. This plan caps your monthly payments at 15 percent of your discretionary income and allows you to pay your loans for up to 25 years. After 25 years, any remaining balance will be forgiven.
However, there are some things you should know. First, you need to qualify. Typically, if your annual income is less than what you owe, you’ll qualify. Your payments must also be lower than what they might be under the Standard Repayment Plan.
While you may have affordable payments under IBR, you will end up paying more in interest. And if you get your loans forgiven at the end of 25 years, your forgiven loans may be considered taxable income. In other words, if you have $40,000 forgiven, you could see a several thousand dollar tax bill, as current tax law will consider the forgiven loans as income.
Pay As You Earn
This is another plan that can help you if you are struggling to repay your loans. Pay As You Earn caps your monthly payments at 10 percent of your discretionary income. Under this plan, your repayment period is 20 years. Similar to IBR, you must qualify for this plan based on your income. Your remaining balance will be forgiven after 20 years. However, the same tax trap still remains and you may see a hefty tax bill if your loans are forgiven.
Income-Contingent Repayment Plan
This plan is one of the only income-driven plans that you don’t have to qualify for. Under Income-Contingent Repayment plans, your payments are calculated each year based on a number of factors: your adjusted gross income, family size, and the total amount of loans you have. Your repayment period is 25 years and any unpaid portion after that will be forgiven. Once again, you may have to pay income tax on your forgiven loans.
Which One Should You Choose?
As you can see, there are a variety of options to choose from. But which one is right for you? Well, that depends on your income and how quickly you want to pay off your loans. If you can afford it, I think the Standard Repayment Plan is best. If you’re struggling, consider using IBR until you can afford more. You can make arrangements with your loan servicer to set up a repayment plan. The key is to do your research and pick a plan that is best for your financial situation.