The value of a great education isn’t priceless, it’s years of student loan repayments. Maybe you’ve just graduated or maybe you’ve been out in the working world for a while and your financial situation has changed. If so, you’re going to want to choose a repayment plan that provides you with the right balance between minimizing your monthly payment and minimizing your total interest paid over the life of your loan. This post focuses on federal student loan repayment but check out my other posts on private student loan repayment, loan consolidation, and loan refinancing(that post is highly recommended!) to learn all you need to know about paying off your loans and saving the most money!
Federal student loans repayment plans generally extend between 10 to 25 years. You can choose several plans for repayment.
First Things First:
These are some resources that I like and suggest to readers and friends. While this guide is a short primer on paying off your loans, these books are inexpensive and in-depth resources to help you save money and pay off your debt sooner.
Paying Off Student Loans:
- The Standard Plan: If you’re itching to get rid of your student loans as quickly as possible, this is the plan for you. This is also the plan with which you will pay the least interest. Your monthly payments might be slightly higher with this plan, but you’ll be done paying years sooner. In fact, for this plan you usually have ten years or less to pay your loans off.
- The Graduated Plan: This plan offers you lower monthly payments at the start of your loan with payments gradually increasing every two years. The idea behind this plan is that when you first graduate, you’ll be making far less than you will later on in your career. This repayment plan is generally for ten years as well. The problem with this plan is that for the first few years you might just be paying interest and not touching the principal balance, which means your total debt will not actually be decreasing. You’ll end up paying more in interest using this method.
< Income-Based Repayment Plan: This plan is for student loan borrowers who have large amounts of debt and small annual incomes. You usually are eligible if your annual income is less than your student loan debt. If you borrowed before July 1, 2014 then you will pay 15% of your discretionary income over 25 years. If you borrowed before July 1, 2014 then you will pay 10% of your discretionary income for 20 years. This plan takes into account not just your income but also your family size. As with any plan that extends payments over a longer term, you will pay significantly more in interest. There is a chance, however that after the 20 or 25 years the remainder of your loan will be forgiven. If any amount is forgiven, this might have income tax implications since forgiven debts are treated as taxable income.
- Pay As You Earn Repayment Plan: This plan requires you to pay 10% of your discretionary income for 20 years. In all other ways, it is very similar to the Income-Based Repayment Plan.
- Income-Contingent Repayment Plan: This plan requires you to pay the lessor of either 20% of your discretionary income or whatever you would pay on a fixed payment plan over a twelve year term, adjusted to your income. This plan will usually require you to make larger payments than the Income-Based Plan and the Pay as Your Earn Plan but will still be based on your income and family size. This plan does not have an income requirement in order to enroll.
- Extended Payment Plan: This plan allows you to make smaller payments over a longer period time compared to the Standard Plan. To qualify, you must have over $30,000 in student loans. You can pay a fixed or a graduated amount and extend your payments for up to 25 years.
Pros and Cons:
There are pros and cons to each of the above methods. Ultimately, you will have to decide whether its more important to you to pay less interest over the course of your loan or to have smaller monthly payments. Obviously, if you’re not making very much smaller monthly payments might be necessary. However, if you’re making enough to potentially pay more than I would suggest you do so even if it means you have to scrimp a little. It’s always best to pay less interest and get your student loans out of the way so that you can move on to other important life events like getting married, having kids, or saving for a down payment on a home. For info on how to repay your private student loans check out this post!