When it comes to repaying your student loans, the different options can at first be overwhelming.
There are seven different plans available to choose from to repay your federal student loans, four of which are based on your income level.
After recovering from the initial sticker shock of seeing just how much student loan debt you have accumulated, it’s best to sit down and decide which of the various repayment plans will work best for you.
Basic Federal Repayment Plans
Basic repayment plans do not result in monthly payments that depend upon your income or debt ratio.
Unless you elect otherwise, you will automatically be enrolled in a Standard repayment plan.
You must contact your loan servicer to select a Graduated or Extended repayment plan.
Standard
A Standard repayment plan is the default federal student loan repayment plan. Under this plan, you pay a fixed monthly amount over a 10-year period.
Your monthly loan payment does not increase or decrease throughout the ten years, and at the end of the 10-year repayment period, your student loan principal and interest are paid off in full.
Graduated
A Graduated repayment plan is similar to the Standard plan in that the repayment period is 10 years, and at the end of the 10 years, your student loans will be paid off in full.
However, under a Graduated plan, your initial monthly payment starts off lower, and increases throughout the 10-year repayment period.
You will ultimately end up paying more in total for your student loans over time under the Graduated plan than you will under the Standard 10-year plan.
Extended
An Extended repayment plan allows you to choose between fixed or graduated payments.
The repayment period, however, is 25 years, as opposed to the 10-year repayment periods under the Standard and Graduated repayment plans.
If you are either a Direct Loan borrower or a Federal Family Education Loan Program (“FFEL Program”) borrower, you must have at least $30,000.00 in outstanding Direct Loans or FFEL Program loans in order to qualify for an Extended repayment plan.
Your monthly payments under the Extended plan will be lower than your payments would be under either a Standard or Graduated repayment plan, but, due to paying interest for 25 years as opposed to 10 years, you will pay more over time under an Extended plan than you would under a Standard or Graduated plan.
Income-Driven Repayment Plans
Income-Driven plans set your monthly payment at an amount between 10% and 20% of your discretionary income and increase your repayment period from the Standard 10 years to 20 or 25 years.
At the end of the 20 or 25-year repayment period the remaining balance on your student loans is forgiven, however, the amount forgiven is treated as taxable income by the IRS.
Therefore, you could end up with a hefty tax bill depending on how much of your loans are forgiven at the end of the repayment period.
While these plans will result in a lower monthly payment than payments under a basic federal repayment plan, you will end up paying more in interest over the course of your repayment period.
Anyone wishing to utilize an Income-Driven plan must apply for such a plan through their loan servicer.
You will be asked to provide information about their income and family size. Either you or your loan servicer can select which Income-Driven plan is the best for you.
If you opt for your loan servicer choosing a plan for you, your servicer will put you on the plan with the lowest monthly payment for which you qualify.
Each year you will have to re-certify your income and family size to remain on an Income-Driven plan.
Changes to your income or family size may result in a change in your monthly payment.
Your loan servicer will inform you of the deadline for recertification. It is essential you recertify prior to the deadline, or else you risk a large increase in your monthly payment.
Income-Based Repayment (IBR)
Under an Income-Based Repayment plan, your monthly payment will be either 10% or 15% of your discretionary income (depending on when you received your first loans), but never more than what you would have paid under the Standard 10-year plan.
In order to qualify for this plan, you must have high student loan debt relative to your income.
If you are married, your spouse’s income or loan debt will only be considered if you file a joint tax return.
Any outstanding balance on your student loans will be forgiven at the end of your 20 or 25-year repayment period, depending on when you received your first loans
Again, you may have to pay income tax on the total amount that is forgiven, which is something to keep in mind as this tax liability can be quite large depending on the amount of your loans forgiven.
Income-Contingent Repayment (ICR)
Under an Income-Contingent Repayment plan, your monthly payment will be the lesser of 20% of your discretionary income or the amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.
Any Direct Loan borrower with an eligible loan type may choose the Income-Contingent Repayment plan.
Further, this is the only Income-Driven plan available to Parent PLUS borrowers, who may access the plan by consolidating their Parent PLUS Loans into a Direct Consolidation Loan.
If you are married, your spouse’s income or loan debt will only be considered if you file a joint tax return or if you chose to repay your Direct Loans jointly with your spouse.
Any outstanding balance on your student loans will be forgiven at the end of your 25-year repayment period.
Again, like all the Income-Driven plans, the amount forgiven is subject to income tax the year in which it is forgiven.
Revised Pay as You Earn (REPAYE)
Under a Revised Pay as You Earn repayment plan, your monthly payments will be 10% of your discretionary income.
Any Direct Loan borrower with an eligible loan type may choose this plan. Your repayment period under a Revised Pay as You Earn plan depends on the level of education for which your loans were put towards.
If all of your student loans were taken out for undergraduate study, your repayment period is 20 years.
If any loans were taken out for graduate or professional study, your repayment period is 25 years.
If you’re married, both you and your spouse’s income or loan debt will be considered, whether you file your taxes jointly or separately.
Any outstanding balance on your student loans will be forgiven after 20 or 25 years, but again, this amount is subject to income tax in the year in which it is forgiven.
Pay as You Earn (PAYE)
Under a Pay as You Earn repayment plan, your monthly payment will be 10% of your discretionary income, but never more than you would have paid under a Standard 10-year plan.
To qualify for this plan, you must be a new borrower on or after October 1, 2007, and must have received a disbursement of a Direct Loan on or after October 1, 2011.
You also must have a high debt relative to your income in order to qualify for a Pay as You Earn plan.
If you are married, your spouse’s income or debt will only be considered if you file a joint tax return.
Any outstanding balance on your student loans will be forgiven after a 20-year repayment period, which, of course, is also subject to income tax just like any of the other Income-Driven plans.
While repaying your student loans can seem complicated and overwhelming, it doesn’t have to be.
Call My Financial Solutions today for a free loan assessment. We’ll go over your loans with you and give you all the information you need to make an informed decision about which repayment plan might be suitable for you.