Borrowing

How to pick the federal student loan repayment plan that's right for you

Twenty/20

If you're one of the 43 million Americans with federal student loans, you know there's no one-size-fits-all approach to repayment. There are, in fact, more than half a dozen different repayment plans, each with various ins and outs depending on the type of loan and the amount borrowed.

Here's an overview to help you understand the options and figure out what might be best for you.

What is a student loan repayment plan?

Your repayment plan determines how much your monthly payment will be, how long it takes to pay off your debt in full, and how much interest you'll accrue over time. Each has a different payment structure and eligibility requirements. While standard repayment plans are designed to help you pay off your debt within a certain time frame, for instance, income-driven plans stretch out your repayment period but allow for more room in your budget by pegging your payment to your salary.

Here's a rough breakdown of the repayment plans available to students with federal student loan debt.

Types of repayment plans

  • Standard repayment requires a fixed monthly payment to ensure that your debt is paid off in exactly 10 years. While this plan is designed to help you pay off your debt quickly and save you the most money over time, it tends to have the highest monthly payment.
  • Graduated repayment means payments increase every two years in proportion to your income. This may be a good option if you think your income will increase in the next few years, though some financial advisors warn against assuming your earnings will continue to rise over a decade.
  • Extended repayment gives borrowers 25 years instead of 10 to pay back debt, meaning you'll have lower monthly payments. However, because your interest rate will remain the same, you're likely to pay more in accrued interest. Under this plan, you have two payment options: fixed or graduated.
  • Income-driven plans peg the required monthly payment to your income, your family size, and the total amount borrowed. There are several different kinds of income-driven plans, and eligibility requirements and repayment timelines vary. Most payments are capped at 10%-20% of your discretionary income. Certain income-driven plans, like Income-Sensitive Repayment (ISR) and the Pay as You Earn (PAYE) plan, have strict eligibility requirements, and you'll have to verify your earnings and family situation to prove you still qualify from year to year.

Other factors to consider

Before selecting or altering your repayment plan, take time to get organized and and weigh your options. Your loan servicer or a financial advisor can help you understand each plan and come to a decision.

Here are a few pointers to help you parse the details of each repayment plan.

  • Be aware of eligibility requirements: Some could work against you down the line. Graduated plans, for example, assume that your income is increasing regularly.
  • Get organized: "I would definitely suggest that [borrowers] get a budget routine together and utilize the repayment estimator, and that'll help them to see what payment they're going to need to make," says April Sanderson, a financial counselor for LSS Financial Counseling.
  • Keep long-term costs in mind: For income-driven plans that offer loan forgiveness after 20-25 years, the remaining balance could be considered taxable income, which means you may be slapped with a hefty bill in April. And, overall, extending your plan means you'll pay more over time.
  • Remember your options: If you're considering a career in public service or as a teacher, for instance, you may be eligible for a federal loan forgiveness program. You may also want to look for a job at a company that offers student loan benefits or repayment assistance plans.

And don't forget to factor in your long-term goals, like whether you plan on seeking a high-paying job or going to graduate school. That way, your repayment plan will align with your financial situation, even when and if it changes.

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