Student Loan Repayment Options: What’s the Best Way to Pay?
Student loan borrowers have a variety of options when the time comes to start repaying their loans. Federal student loans offer the most flexibility, while the choices with private student loans are more limited. The best way for you to repay will depend on the kind of loans you have, how much you owe, and where you stand financially after graduation. This guide explores your current choices.
Key Takeaways
- Your student loan repayment options depend on the type of loan you have.
- Private student loans offer several options for repayment but federal student loans provide the most flexibility.
- Some repayment plans allow you to make smaller payments over a longer period of time, although that may mean paying more interest in total.
- Several federal plans base your payments on your income.
- Your lender may offer you a deferment or forbearance period if you can’t keep up with your loan payments.
Federal Student Loan Repayment Options
There are multiple repayment plans you may be eligible for if you have federal student loans. Here’s how they compare.
One quick note: So far, the Public Service Loan Forgiveness (PSLF) program rejected the majority of applicants (only 2.5% have been approved), so be forewarned that choosing a repayment plan that is a good option for the program doesn’t guarantee that your loans will be forgiven.
1. Standard Repayment Plan
- Who’s Eligible: All borrowers.
- How it Works: Payments are fixed with loans paid off over a 10-year period.
- Who it Benefits Borrowers who want to repay their loans over the shortest period of time to minimize interest charges.
- Who it Doesn’t Benefit: Borrowers interested in Public Service Loan Forgiveness.
2. Graduated Repayment Plan
- Who’s Eligible: All borrowers.
- How it Works: Payments start off lower and increase gradually with loans paid in full over a 10-year period.
- Who it Benefits: Borrowers who expect their income to increase over time and want to pay off their loans as quickly as possible.
- Who it Doesn’t Benefit: Borrowers interested in Public Service Loan Forgiveness.
3. Extended Repayment Plan
- Who’s Eligible: All borrowers, although federal Direct Loan and Federal Family Education Loan (FFEL) borrowers must owe more than $30,000.
- How it Works: Payments may be fixed or graduated with loans paid in full over a period of up to 25 years.
- Who it Benefits: Borrowers who have larger loan balances and need a smaller monthly loan payment.
- Who it Doesn’t Benefit: Borrowers interested in Public Service Loan Forgiveness or who want to pay the least amount of interest possible on their loans.
4. Pay As You Earn Repayment Plan (PAYE)
- Who’s Eligible: Borrowers who received a disbursement of a Direct Loan on or after Oct. 1, 2011.
- How it Works: PAYE takes monthly payments at 10% of discretionary income but never exceeds what you would pay on a Standard Repayment Plan.
- Who it Benefits: People who need a low monthly payment and/or are interested in Public Service Loan Forgiveness.
- Who it Doesn’t Benefit: Borrowers whose income fluctuates significantly from one year to the next.
5. Revised Pay As You Earn Repayment Plan (REPAYE)
- Who’s 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 Benefits: Direct Loan borrowers who need a low monthly payment and don’t mind potentially paying more in interest over the life of the loan compared with a Standard Repayment Plan. Also those interested in Public Service Loan Forgiveness.
- Who it Doesn’t Benefit: Married couples who file a joint return and have a higher combined income.
6. Income-Based Repayment Plan (IBR)
- Who’s Eligible: Borrowers with Direct Subsidized and Unsubsidized loans, Subsidized and Unsubsidized Federal Stafford loans, student PLUS loans, and consolidation loans—but not PLUS loans made to parents. Borrowers must also have high debt relative to their income.
- How it Works: Monthly payments are either 10% or 15% of discretionary income, based on when you borrowed, but never more than you’d pay on a 10-year Standard Repayment Plan. After 20 or 25 years of payments, you’ll be eligible for Public Service Loan Forgiveness.
- Who it Benefits: People who have a high debt balance and need smaller monthly payments due to a lower income, as well as anyone interested in Public Service Loan Forgiveness.
- Who it Doesn’t Benefit: Borrowers who can afford to put more than 10% or 15% of their income toward repayment each month and pay off their loan faster.
7. Income-Contingent Repayment Plan (ICR)
- Who’s 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’d pay over 12 years with a fixed payment based on your income, whichever is less.
- Who it Benefits: Borrowers who can afford to commit more of their monthly income to loan repayment, but not the amount required by a Standard Repayment Plan. Also those interested in Public Service Loan Forgiveness.
- Who it Doesn’t Benefit: Borrowers who owe anything other than Direct Loans or married couples who file jointly and are in a higher tax bracket.
8. Income-Sensitive Repayment Plan
- Who’s Eligible: Federal Family Education Loan borrowers.
- How it Works: Monthly payments are based on annual income, with loans paid in full over 15 years.
- Who it Benefits: FFEL borrowers who want a lower monthly payment than they’d get on a Standard or Graduated Repayment plan.
- Who it Doesn’t Benefit: Borrowers who are interested in Public Service Loan Forgiveness.
The Department of Education suspended interest and monthly payments on federally held student loans through Dec. 31, 2022. The American Rescue Plan passed by Congress and signed by President Biden in March 2021 also includes a provision that student loan forgiveness issued between Jan. 1, 2021, and Dec. 31, 2025, will not be taxable to the recipient.
Which Federal Student Loan Repayment Option Is Best?
The answer to this question can be different for every borrower. “Student loan repayment isn’t one size fits all, but the majority of people just try to pay back their debt normally,” says Shann Grewal, former vice president of IonTuition. “When borrowers don’t look for a repayment plan that best fits their situation, it has outsize impacts.”
Your choice of plan can affect other financial decisions you make. If you commit, for example, to a 10-year Standard Repayment Plan based on the salary you’re making at your first job after college, that could influence your future career path if you decide to stay put until the loans are paid off. Your loans may be zeroed out, but in the meantime, you could miss out on chances to increase your salary or advance yourself professionally.
It’s also important to keep income-driven repayment plans and their usefulness in perspective. Whether to choose an income-driven repayment plan can hinge on several factors, including what you’re earning now and your future earning potential.
“Some students will enter the workforce immediately with a high-paying job, while others will be required to work their way up,” says Lena Chukhno, general manager of student loan refinancing at Earnest. Other variables that come into play include the amount of debt owed 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 picking a student loan repayment plan. “You can always refinance your loan down the line if the situation changes, but it’s best to start off on the right note so you don’t get into financial trouble.”
Eligibility for PAYE, REPAYE, IBR, and ICR repayment plans isn’t guaranteed from year to year. Your eligibility and payment amounts are recalculated annually, based on your household income and family size.
Private Student Loan Repayment Options
Private student loans typically offer fewer choices for borrowers. These include:
- Immediate Repayment: Principal and interest payments begin as soon as your loan is disbursed.
- Interest-only Payments: You make interest-only payments while in school, then begin principal and interest payments once you graduate or drop below half-time enrollment.
- Fixed Payments: You pay a low fixed amount while in school, then begin making larger, regular payments once you leave school or drop below half-time enrollment status.
- Full Deferment: You pay nothing while enrolled in school and begin making interest and principal payments within a set time frame after you leave school.
Depending on your lender, you may be eligible for a deferment or forbearance period if you’re not able to keep up with your regular loan payments. But this typically requires a financial hardship and it isn’t offered by every lender.
If you have private student loans, it’s important to do the math so you know what the various repayment options will cost you in interest over the life of the loan. You might also consider refinancing your private loans if that would get you a lower interest rate.
This can save you money on interest during the repayment term. Refinancing a student loan typically involves a credit check, so if you don’t have a solid credit history yet, you may need a cosigner to qualify. Finally, if you’re struggling to manage your monthly payments, contact your lender as soon as you can and see what can be worked out.
The Bottom Line
If you owe education debt, take time to get to know your repayment options. Ideally, this is something you do before graduation so you have an idea of which repayment plan you want to start with. If you’re choosing an income-driven plan, reevaluate your finances each year to see if another repayment option might be better for saving money on interest charges.
