Student Loans: Which Repayment Plan is Right for You?

When I graduated from college *ahem* eons ago and it came time to pay off my federal student loans, I had no clue there were different options. I opted into the standard repayment plan because I didn’t know any better. Looking back, if I had been aware that there are quite a few different repayment options, I would’ve done my due diligence to see which was the best fit for my budget. 

I’d love to prevent you from making the same mistakes I made. Here’s how to go about gauging which student loan repayment is best for you: 

Research Your Options 

You’re placed in the standard 10-year repayment plan by default. However, this is typically the highest monthly payment plan. “So, before you fret about whether you can afford your student loans, look at what other payment options are available,” says Robert Farrington, founder of The College Investor. 

Here are the student repayment options to choose from: 

Standard Repayment Plan. The standard repayment plan is the most basic one. If you don’t choose a repayment plan, this is the one you’ll default into. You’ll be required to pay a fixed amount for 10 years. 

Graduated Repayment Plan. The payment structure is graduated. Your payments start lower at first and will increase every two years. You’ll be required to pay off your loans within 10 years. 

Extended Repayment Plan. Payments will be either fixed or graduated, and the amount will be lower than both the standard repayment plan and the graduated repayment plan. You’ll pay off your loans within 25 years. 

Revised Pay As You Earn Repayment Plan (REPAYE). Under REPAYE, the amount you owe each month will be 10 percent of your discretionary income. 

If your loans were for undergraduate studies, you’ll have 20 years to pay off your balance. If you took out any loans for graduate or professional studies, you’ll have 25 years to pay off your student debt. Any remaining balance after that time will be forgiven. 

With all income-based repayment plans, your monthly payments are recalculated each year. And how much you pay is dependent on the size of your family and your income. 

Pay As You Earn Repayment Plan (PAYE). With PAYE, you’ll pay 10 percent of your discretionary income. But it will never be more than what you’ll be paying if you opted for the standard repayment plan. To qualify for PAYE, you must be a new borrower on or after October 1, 2007. With PAYE, any outstanding loans will be forgiven after 20 years. 

Income-Based Repayment Plan (IBR). If you’re on an IBR plan, your monthly payments will be either 10 or 15 percent of your discretionary income. (Note: They’ll never be more than you would’ve paid under the 10-year standard repayment plan.) The balance on these loans will be forgiven after 20 or 25 years, depending on when you received your first loans. 

Income-Contingent Repayment Plan (ICR). On this income-based repayment plan, your payment would be either 20 percent of discretionary income or the amount you’d pay on a repayment plan with a fixed payment over 12 years, whichever is less.

Income-Sensitive Repayment Plan. Under this plan, your monthly payments are based on your annual income and can increase or decrease if your income changes. Your student loan balance will be paid off within 10 years. 

Know What You’re Eligible For

To narrow down your choices, figure out which repayment plans you’re eligible for. Some repayment plans are only available if you’ve taken out certain loans or if they’re over a certain amount. For the nitty-gritty details, you can check out the U.S. Department of Education’s Federal Student Aid website. 

There’s also Public Service Loan Forgiveness (PSLF), which is for those who are working in the government, serving in the military, or employed by non-profits. To be eligible for PSLF, you must be on an income-driven plan. 

Figure Out Which Plan Works Best for Your Budget 

The most important thing when it comes to repayment is whether you can keep up with payments. “The best repayment plan for you is the one that you can afford to make the payments on every month — without missing,” says Farrington. After all, this is a bill you could have to pay for the next 25 years. 

Because the standard repayment plan has higher monthly payments, an income-driven plan might be the best fit for your budget, explains Farrington. Income-driven plans — such as Income-Based Repayment, Pay As You Earn, and Revised Pay As You Earn — set your monthly payment at a percentage of your income. It’s either 10 percent or 15 percent of your discretionary income. “This can be helpful when you’re just starting, as your payments could legally be as low as $0 per month if your income is low enough,” says Farrington. 

On the flip side, lowering your monthly payments and stretching out the time it takes you to repay your student debt means you could be paying more in the long run. That’s because you’ll be paying more on the interest. 

If you’re not entirely sure which repayment plan is the right one for you, no need to fret. Just remember that you’re not tied down to a particular plan for the duration of the loan.

Your Repayment Plan Isn’t Set in Stone

Here’s the good news: you can change your repayment plan at any time. If you’re moving from a standard, extended, or graduated plan, you can move to an income-driven plan without any concerns, says Farrington. 

Don’t delay paying off your loans simply because you’re afraid of being locked into making the same payments every month for the next decade. Who knows what might change for you financially? “If budgeting is an issue, don’t defer your loans because you can’t pay,” Farrington adds. “Instead, switch to an income-driven plan and base it on your new income.” 

But if you’re already on an income-driven plan, and you decide to switch to a standard repayment plan, there is something you’ll want to take into consideration: any unpaid interest will capitalize on the loan.

Choosing a repayment plan for your student debt can feel disorienting. But by knowing the basic details, you can better gauge which repayment plan is the best fit for your budget.