Student loans come in handy when you are financially short to cover your tuition fees, books, and other expenses in college.
The problem is, as with other types of loans, paying them off can be extremely challenging.
As early as now, you should be asking yourself, “What is the best student loan repayment plan for me?”
This guide explores your options so that you can figure out which plan will give you the most leniency and have the least interest.
Types of Student Loans
Higher education is something that not everyone can afford, and this is where student loans come in.
They come in many forms, and it is up to you to decide which one will work best with your needs and paying capabilities.
Let’s start by discussing the three different types of student loans: federal, state, and private loans.
Federal Student Loans
Federal loans are those offered by the government.
Compared to the other two, this type of loan is the most flexible, particularly when it comes to repayments.
For example, borrowers can be given several options like tying their payments to their income or even getting their loans forgiven if they work in a public service field.
In addition to grants and merit-based scholarships, many states offer loan programs for qualified students.
These loans generally behave like private loans.
That said, state loan programs vary in size and can be based on either low or fixed interest rates.
Private student loans are those offered by local banks, credit unions, and online lenders.
While this type of loan usually has a higher interest rate and less flexible repayment terms, it appeals to borrowers with bad credit.
Repayment Options for Federal Student Loans
There are several ways by which you can repay your federal student loans.
Taking into account your financial situation is your starting point towards choosing the best repayment plan.
Standard Repayment Plan
If you’re after saving money, the Standard Repayment Plan might be the best option for you.
It’s the basic plan for federal student loans.
Unless you sign up for a different repayment scheme, you will be automatically enrolled in this plan.
How It Works
The Standard Repayment Plan has a fixed term of 10 years, which means you will be paying a fixed amount monthly until you pay off your loan.
This plan works pretty simply.
For example, you have $30,000 in student loans.
By the time you start paying off your debt, the interest of, say, 3.75% kicks in.
Based on the standard plan, your monthly payment will be $300.
Thus, the total lifetime costs of your student loans would be $36,022 after 10 years.
Advantages and Drawbacks
The Standard Repayment Plan is the best option for student borrowers who want to pay off their loan in the shortest possible time and with the smallest interest.
Given these benefits, you will have more chances of devoting your money to other financial endeavors, such as buying a new home or saving up for retirement.
Still, the biggest drawback of the Standard Repayment Plan is the high monthly payment amount.
Paying $300 each month might seem daunting at first.
And this becomes especially true if you’re just starting to live independently and aren’t earning as much as someone who’s further along with their career.
That said, if you can’t afford the monthly payments, you may want to look into other student loan repayment options, which we will be discussing next.
Graduated Repayment Plan
Similar to Standard Repayment, this plan also has a lifespan of 10 years.
The only difference is that your monthly payments start lower and gradually increase over the repayment period.
How It Works
On a Graduated Repayment Plan, your payments will be initially lower than what you would pay if they were under a standard plan.
Still, they are never too low that the monthly interest is not covered.
Your first payment will usually be half of the monthly payment under a standard term, with a minimum amount of $25.
Then, every two years, your monthly payment increases.
Do note that this plan has an “extended” version, which allows you to pay off your debt for 25 years.
Advantages and Drawbacks
This plan appeals to recent graduates on entry-level salaries who want smaller payments but are more than capable of paying an income-driven plan.
If you don’t have a lot of cash flow or are still learning how to build a solid financial foundation, this might be the best repayment option.
However, since you are making lower payments in the first few years, you will end up paying more interest throughout your loan term.
Also, note that your monthly repayments increase over time.
Based on the example we used earlier, your monthly due can reach as high as $900 per month.
Still, you will just be paying more or less $140 in your first two years of repayment.
Income-Driven Repayment Plan
As the term suggests, an Income-Driven Repayment Plan allows you to make monthly payments according to your income.
Therefore, as your income increases, your monthly due also increases.
How It Works
In IDR, your monthly repayment is tied to your discretionary income as calculated by the federal government.
You can pay between 10% and 20% of your earnings, depending on the type of IDR plan you choose.
If you have zero income for a certain period, then that means you don’t have to pay your monthly dues until such time that you regain your cash flow.
Types of IDR
An income-driven repayment plan comes in four types:
- Pay As You Earn System (PAYE)
You will likely qualify for this program if you can’t afford payments, have other federal direct loans, and didn’t start college until after 2007.
The repayment term of PAYE is 20 years, and your monthly due is capped at 10% of your discretionary income.
This plan is suitable for you if you are married and both you and your spouse have incomes but don’t expect them to increase much over time.
- Revised Pay As You Earn System (REPAYE)
Under the REPAYE program, your monthly payment is capped at 10% of your gross income (minus taxes).
Additionally, your remaining loan balance is forgiven after 20 or 25 years of repayment.
This one has fewer eligibility requirements than the other IDR types, and you can sign up for it no matter how much your current income is.
This might be right for you if you are single (REPAYE takes into account your spouse’s earnings).
It is also the best plant if you don’t have grad school debt, you expect a much higher income in the future, and you don’t qualify for the other IDR plans.
- Income-Contingent Repayment System (ICR)
This plan will cost you more each month than other IDR repayment options.
Still, compared to the others, it allows you to potentially pay a lower interest.
You might consider ICR if you have direct student loans or a consolidated loan that includes them.
However, if you are married and you and your spouse file jointly under a higher tax bracket, this option may not work for you.
Also, parent loan borrowers (including Parent PLUS) are not eligible for ICR.
- Income-Based Repayment System (IBR)
This repayment plan has a term of 25 years.
It caps your monthly payment at 15% of what’s left in your check after paying your taxes and bills.
IBR has the same eligibility requirements as PAYE.
However, it is only applicable for those who took out student loans on or after July 1, 2014.
Advantages and Drawbacks
If you qualify for student loan forgiveness, you might find an Income-Driven Repayment Plan a more practical choice.
Public Service Loan Forgiveness is a federal program that is available to government and some nonprofit employees.
Under any type of IDR, your loan could be forgiven after you make 120 qualifying loan payments.
Even though IDR options can make your monthly student loan payments more affordable, these programs have some potential disadvantages, too, including a higher interest.
Since you will be paying off your debt for longer, your loan will gain more interest.
Lastly, if you are married, your spouse’s income will most likely be factored in when the government computes your monthly payments, especially if you file taxes jointly.
When deciding on the repayment plan for your federal student loan, it’s important to assess your current income, the remaining amount you owe, and whether your financial situation will change in the future.
Repayment Options for State and Private Student Loans
As we discussed earlier, state student loans usually behave in the same manner as private student loans.
Unfortunately, these loans offer fewer repayment choices for borrowers.
Under this plan, you will have to start making full monthly payments while still in school.
If you can swing it, an immediate repayment plan can greatly minimize the interest you pay, which can save you more money.
However, it isn’t realistic for most students to make full monthly payments when they’re still studying and don’t have a stable stream of income.
Interest-Only Repayment Plan
If you choose this plan, you are expected to pay only your loan’s interest while you’re still studying.
It is a great way to manage your monthly repayments and lower the total cost of your loans.
Even if you aren’t able to reduce your remaining balance until you graduate, you can stop the interests from ballooning, saving you more money in the long run.
Partial Interest Repayment Plan
With a partial repayment system, you will be paying a fraction of your loan’s interest on a fixed monthly amount.
However, you have to note that you will still owe more than you borrowed when you finish college.
Nevertheless, choosing this plan is a bit easier on your check and still helps keep your loan balance under control.
Full Deferment Plan
The last option for repaying private student loans and state student loans is through deferment.
Under this plan, you won’t be making a single payment until you finish your degree.
Some lenders (or state-sponsored loans) even offer up to six months of grace period after graduation.
The problem is, the loan interest will keep growing, along with other charges, resulting in the maximum possible loan balance you could have.
Perhaps the only advantage of this repayment plan is it eliminates your worries about repaying your student loans while you’re still in school.
When deciding on a repayment plan for private student loans, it’s important to do the math beforehand.
In this way, you have an idea of how much each option will cost you in interest over the repayment term.
Ideally, you should choose the plan that works with your current financial situation and would have the least amount of interest added to your original loan.
What Is the Best Student Loan Repayment Plan?
So, what is the best student loan repayment plan for you?
There are several factors you have to consider, such as the type of loans you have, how much you owe, and where you financially stand.
If you have federal student loans, you have more choices when it comes to repayment.
These include standard repayment, graduated repayment, and income-driven repayment plans, under which you have more options.
Still, remember that the repayment options for federal student loans are based on certain eligibility requirements.
Therefore, not all of them may apply to you.
Meanwhile, if you owe student loans from private lenders, state agencies, or state-chartered nonprofit organizations, your options are limited to immediate, interest-only, partial interest, and deferment plans.
Always do the math first so that you can figure out which repayment plan is the most convenient, realistic, and practical for you.
The standard repayment terms for both federal and private student loans are 10, 20, and 30 years.
Some private lenders offer shorter terms, ranging from five to seven years.
Generally, a shorter repayment plan gives you the most savings, although they most likely involve higher monthly payments.
That said, opting for a shorter repayment term is the best move, as long as you can swing it.
If you have private student loans, you may consider refinancing them for a potentially lower interest rate if you have a solid credit history.