If you’re paying off federal student loans, it’s crucial you know the various repayment plans. Being in the wrong repayment plan can cost you thousands of dollars. Although payment plans have changed over time, the current options represent a great opportunity for borrowers to save money or modify payments to fit their goals, budget, and lifestyle.
What are the main federal student loan repayment plans?
To start, everyone is eligible for the Standard Repayment Plan. This plan uses a 10-year repayment window and fixed payments. Although you might pay less over time with this plan, this default, cookie-cutter path might not fit your budget or goals.
Then we have the Graduated Repayment Plan. This plan also uses a 10-year repayment schedule, but changes the payments. The borrower pays less at the beginning and more as the loan ages. Due to the growth from interest, the Graduated Repayment Plan can end up costing you more. Importantly, this is not a qualifying plan for Public Service Loan Forgiveness.
Next up is the Extended Repayment Plan. Some borrowers choose the Extended Repayment Plan to lower their monthly payments by extending the term of the loan. The Extended Payment Plan ensures loans are paid off within 25 years. The consequence? You will pay more over time compared to the 10-year standard payment plan. Again, this is not a qualifying plan for Public Service Loan Forgiveness.
The comes the Pay as You Earn (PAYE) and Revised Pay as You Earn (RPAYE). Generally speaking, you will pay 10% of your discretionary income on these plans. These payments are recalculated when you report updated income and family information on an annual basis. These are qualifying plans for Public Service Loan Forgiveness.
One of the major perks with these plans is loan forgiveness after 20/25 years, depending on the plan selected. Although this is a HUGE perk, keep in mind there are tax implications for this forgiveness. So it’s not 100% free.
What are Income Payment Plans?
Finally, we have the income payment plans, designed for borrowers with high debt loads compared to their income. These include the Income-Based Repayment Plan (IBR), Income-Contingent Repayment Plan (ICR), and Income-Sensitive Repayment Plan. Although the formula can be complex, general idea behind these plans is a percentage of your income (around 10-20%) is used to calculate your payment. Although the IBR and ICR plans are good if you’re pursuing for Public Service Loan Forgiveness, the Income-Sensitive Repayment plan is not eligible for this program because it is for Federal Family Education Loan (FFEL) program borrowers.
IBR and ICR plans come with loan forgiveness after 20/25 years, depending on the plan selected. As noted above, there are tax implications for loan forgiveness. On the Income-Sensitive Repayment plan, your loan is paid in full with in 15 years.
Still confused? Contact us for a student loan analysis. To learn more about payment plans, visit this website.