Published in: Student Loans | June 27, 2019

A Comprehensive Guide to Federal Student Loan Repayment Plans

By:  Kailey Hagen

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Choosing the right federal student loan repayment plan can be difficult. This guide will help you make the right choice.

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It's no secret that many college graduates struggle to repay their student loans. A competitive job market, low entry-level salary, and new living expenses can make the standard 10-year federal student loan repayment plan difficult or impossible to keep up with.

Fortunately, the federal government offers seven additional repayment plans to help ease the strain on new graduates' budgets.

Below, I explain all eight of the federal student loan repayment plans, which types of loans are eligible for each, and why you may or may not want to consider them.

Standard repayment plan

Eligible loans: Direct Subsidized and Unsubsidized Loans, Federal Stafford Loans (subsidized and unsubsidized), Direct PLUS Loans, all consolidation loans.

The standard repayment plan is the default repayment plan that all federal student loan borrowers are assigned unless they contact their loan servicer and request to change their repayment plan to one of the other options listed below. All loans and all borrowers are eligible for the standard repayment plan, which requires you to pay a fixed monthly amount over 10 years, or within 10 to 30 years if you've consolidated your federal student loans.

If you want to pay off your student loans quickly, this is your best option. It has the shortest repayment term, and it usually results in the lowest overall costs. But the standard repayment plan has a higher monthly payment than the other repayment plans, so it may not be feasible if your budget is tight.

It's also not your best option if you intend to pursue Public Service Loan Forgiveness (PSLF). In order to qualify for PSLF, you must work for a qualifying organization providing a public service and make 120 on-time student loan payments. But if you made 120 payments on the standard repayment plan, there would be no amount left to forgive at the end. So if you intend to pursue PSLF, you're better off going with an income-driven repayment plan, which will lower your monthly payments and leave some left over after the 10 years to be forgiven.

Graduated repayment plan

Eligible loans: Direct Subsidized and Unsubsidized Loans, Federal Stafford Loans (subsidized and unsubsidized), Direct PLUS Loans, all consolidation loans.

The graduated repayment plan also has a 10-year repayment term, but it's structured a little differently. Instead of a fixed monthly payment for the life of the loan, you'll start with a lower monthly payment that will increase every two years. The idea is that you'll pay less when you're starting out in your career and more later on when your salary will most likely be higher. All federal student loans are eligible for the graduated repayment plan, and the loan term may be extended up to 30 years for consolidation loans.

While you'll still pay off your full balance within 10 years, you'll pay more than you would with the standard repayment plan overall because your smaller initial payments won't reduce your principal as quickly, enabling interest to stack up faster. This plan is also not a qualifying repayment plan for PSLF, so don't choose this if you intend to pursue loan forgiveness.

Extended repayment plan

Eligible loans: Direct Subsidized and Unsubsidized Loans, Federal Stafford Loans (subsidized and unsubsidized), Direct PLUS Loans, all consolidation loans.

The extended repayment plan stretches your loan payments out over 25 years. All federal student loans are eligible for the extended repayment plan as long as the borrower has $30,000 or more in outstanding federal student loans. You can choose a fixed or graduated payment schedule, depending on which fits better in your budget.

Your monthly payments will be lower with the extended repayment plan than with either of the plans mentioned above, but you'll pay more overall. This is also not a qualifying repayment plan for PSLF.

Revised Pay As You Earn repayment plan (REPAYE)

Eligible loans: Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, consolidation loans made to students.

The REPAYE plan stretches your loan term to 20 years or 25 years if you took out loans for graduate school. Your monthly payments are capped at 10% of your discretionary income, which is the difference between your annual income and 150% of the poverty guideline for your state and household size. If you're married, both your income and your spouse’s are factored into the calculation, even if you file taxes separately. Your monthly payment could be greater than what you'd pay with the standard repayment plan, or it may not be. Your loan servicer will recalculate your payment amount every year to take into account your most recent income and family data.

If you haven't finished paying back the loan by the end of the 20- or 25-year period, the government will forgive any remaining balance. However, it will add the forgiven amount to your taxable income for that year, which could raise your tax bill. The exception is if you qualify for PSLF. In this case, you won't owe taxes on the forgiven amount.

Parents who take out student loans for their child's education cannot switch to the REPAYE plan, even if they consolidate their student loans.

Pay As You Earn (PAYE) repayment plan

Eligible loans: Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, consolidation loans made to students.

The pay as you earn (PAYE) plan is similar to the REPAYE plan, but there are a few key differences. First, while your monthly payments could be as much as 10% of your discretionary income, they're guaranteed to not exceed what you'd pay on the standard repayment plan. Second, if you’re married, your loan servicer will only consider your spouse's income when determining your monthly payments if you've filed joint taxes. Third, your loan term will be 20 years, and there is no option to extend it to 25 years if you have graduate student loans.

The eligibility requirements for the PAYE plan are also a little stricter. Parents cannot switch to the PAYE plan, and students can’t either unless they received a federal loan on or after Oct. 1, 2007 and received a federal student loan disbursement on or after Oct. 1, 2011. You must also have a relatively high debt-to-income ratio -- that is, your federal student loan debt must be higher than your annual discretionary income or it must represent a significant portion of your annual income.

Income-Based Repayment plan (IBR)

Eligible loans: Direct Subsidized and Unsubsidized Loans, Federal Stafford Loans (subsidized and unsubsidized), Direct PLUS Loans made to students, consolidation loans made to students.

The IBR plan also bases your monthly payments on your discretionary income. If you received a student loan on or after July 1, 2014, your payments are capped at 10% of your discretionary income, while they could be as high as 15% for federal student loans issued before this date. In either case, you'll never pay more than what you'd pay under the standard repayment plan. You must have a relatively high debt-to-income ratio to be approved, and your loan servicer will recalculate your payments every year. It will consider your spouse's income as well if you file taxes jointly.

There's a 20-year repayment term for loans issued after July 1, 2014, and a 25-year repayment term for loans issued before this. If you haven't paid back the full balance by the end of this period, the government will forgive the remaining amount, though it will get added to your taxable income for the year unless you qualify for PSLF.

Income-Contingent Repayment plan (ICR)

Eligible loans: Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, consolidation loans.

The Income-Contingent Repayment plan (ICR) is the only income-driven repayment plan that's available to parents with Direct PLUS Loans. However, they must consolidate their loans in order to be eligible. Under this plan, you'll pay the lesser of 20% of your discretionary income -- which in this case is considered the difference between your annual income and 100% of the poverty guideline for your state and family size -- or the amount you'd pay on a fixed repayment plan over 12 years, adjusted according to your income. Every year, your loan servicer recalculates your loan payments based on your updated income and family information, and if you're married, it will also consider your spouse's income, unless you file taxes separately.

This repayment plan has a 25-year loan term, and the government will forgive any remaining balance after this time, though it will add it to your taxable income for the year, unless you qualify for PSLF.

Income-Sensitive Repayment plan

Eligible loans: Federal Stafford Loans (subsidized and unsubsidized), Federal Family Education Loan (FFEL) PLUS Loans, FFEL Consolidation Loans.

This repayment plan is only available to those with federal student loans issued by the Federal Family Education (FFEL) program. The FFEL program was discontinued as of July 1, 2010, so new borrowers will have to choose from one of the seven plans listed above instead.

Under this plan, you have the freedom to choose your monthly payment for the first five years, though you must pay at least the amount of interest that's accruing each month, and you must pay back your total balance within 15 years. However, if you choose a low payment for the first five years, your payments could rise significantly afterward, and you may struggle to keep up with them.

How to choose the right federal student loan repayment plan for you

To find the right federal student loan repayment plan for you, go through the above list and rule out any repayment plans that your loan isn't eligible for. Then, consider which of the remaining options lines up best with your goals. If you want to pay off your loans quickly, a shorter repayment term is best. But if you want lower monthly payments now, a longer repayment term is better. If you're trying for PSLF, be sure you choose a repayment plan that is eligible for PSLF.

Talk with your student loan servicer if you're unsure which repayment plan is right for you or which would offer the lowest monthly payment. You can find your loan servicer and its contact information by logging into your My Federal Student Aid account. You can also try out the Department of Education's Repayment Estimator Calculator.

You're free to change your repayment plan at any time, and there's no charge. But before you do so, think through the implications of your decision carefully. A lower payment could give you more breathing room today, but it could cost you more over the long term.

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