Student Loan Repayment Plans: Welcome to Adulthood


Are you among the over 44 million people who received federal student loans to subsidize their education and still owe money to the government? If so, you’ve probably thought about how you are going to get rid of your student debt, which initially may seem Herculean. The following guide aims to alleviate some of the stress and hassle of student loan repayment plans. Based on your income and future career prospects, you’ll want to take time to consider the pluses and minuses of each repayment option.

The size of your debt and the monthly payment you can afford are two of the most important factors to weigh when making your decision, but there are others, too. Let’s break everything down for you.

Starting Statistics 

The sheer amount of student debt incurred in this country each year is astonishing! The official statistics show that 60% of all people who graduate from college or university owe money for their education. Currently, there’s $1.5 trillion (yes, not a typo!) owed in student debt in the United States. Two out of the 44 million borrowers owe more than $100,000, and half a million will have to pay more than $200,000. The federal government owns most of the debt with private student loans accounting for only 7% of all student debt. 

If you examine the numbers more closely, you may notice that there is a downward trend in the amount of money borrowed over the last several years. For example, $106.5 billion borrowed in 2017, which is down from a peak of $126.5 billion borrowed in 2010. Don’t be fooled, though. This decrease is primarily the result of fewer students enrolling in a college or university, and not from any reduction in the overall tuition from academic institutions. In fact, tuition continues to rise every year. So, if you’re fortunate enough to get an education, your first lesson should be learning about student debt repayment programs.  

Federal Student Loan Debt

If you are eligible for Public Service Loan forgiveness, or Loan forgiveness in general, your best bet is to apply for an income-based repayment plan. Under PSLF, a borrower enjoys full Student Loan Forgiveness on their debt if they work for a non-profit or federal body for a set period. Meanwhile, under an income-based plan, you will pay between 10% and 20% of your discretionary income toward your loan. If the payment period under your loan terms is longer than 20 or 25 years, you will receive Student Loan Forgiveness before you’ve paid everything in full. 

Another option is graduated repayment for those borrowers who wish to spend less in the beginning but would like to get rid of their debt for ten years or less. Under this plan, you will have lower monthly payments in the first couple of years and then pay increasingly more until your debt is clear. A standard payment plan is better than a graduated one because the overall amount to pay is less because there is less interest accruing each year. Extended repayment is suitable for this type of borrower who prefers to pay off their debt slower and with less money each month. Plans can extend to 25 or even 30 years if necessary. 

This may sound a little bit confusing, so let’s look at all student loan repayment plans available and examine their pros and cons. A more informed decision will invariably save you money.

Essential Terms 

Repayment plans, in general, are not difficult to understand. For instance, you owe X, the lender charges Y per year, and you have Z amount of time to pay it off. Annual income and other factors will determine the exact value of the student loan payments you make. As a general rule, the longer you take to pay off your debt, the more it’ll cost because of accumulated interest. This is why choosing the right repayment program for your federal loans is so crucial. 

There are six student loan repayment options:

  • Revised Pay as You Earn (REPAYE)
  • Pay as you Earn (PAYE)
  • Income-based repayment 
  • Standard Repayment
  • Graduated Repayment Plan
  • Income Contingent Repayment

Let’s examine each one below so that you can make the best choice.

Revised Pay as You Earn (REPAYE)

This plan is first on our list for a good reason. When they introduced it in 2015, it boasted a significant improvement over the already-existing Pay as you Earn program. This discretionary income plan proposes several changes to the classic PAYE. For example, the 10% cap on the monthly payment that REPAYE fixes is probably its most important feature. It is derived from calculating 10% of your overall monthly income. This feature was implemented to protect borrowers from the unpleasant experience of forbearance. Don’t violate the contract, and you’ll avoid it altogether.

Another great feature is the loan forgiveness option. If you have taken out a loan to cover the expenses of your undergraduate degree, stick to the plan for 20 years, and the rest of your debt will disappear. Just know that if you obtain a graduate degree, you will have to stick to REPAYE for 25 years. This plan is perfect for borrowers with a large amount of debt, e.g., $100,000 or more. All loan servicers out there work with the Revised Pay as you Earn program so that you can make use of its loan forgiveness feature without a problem. 

A Caveat

Married couples may not be the ideal candidates for the Revised Pay as you Earn program. Traditional income-based plans consider the annual income of the original borrower only, but that is not the case with REPAYE. With it, the amount of money your spouse makes every year matters too, and it doesn’t matter if you file for income tax separately or together. As a result, the 10% cap will increase significantly. Bottom line – if you are married or plan to start a family in the foreseeable future choose another option instead of REPAYE.

Pay as You Earn (PAYE)

The concept of public service loan forgiveness for federal loans originated from PAYE. Many considered this loan repayment program to be among the most lasting legacies of Barack Obama’s presidency. The Cabinet introduced it in 2012, and many specialists hailed it as the next step toward making student loans and education, in general, more affordable for the first time in decades. It was fairly evident that previous income-based repayment plans were more or less outdated. That’s why the 10% cap of current discretionary income and a loan forgiveness term of just 20 years seemed refreshing. It is hard to imagine income-based repayment plans today without these features. PAYE, however, isn’t the best repayment available. Like any plan, it has its pros and cons. Read up on them and then contact your loan servicer.

When taking out a loan, you need to know specific terms. Discretionary income is the money you have left each month after you pay income tax, living expenses, etc. In other words, it’s the income you have left for saving or nonessential costs. Having your discretionary income as the basis for your monthly payment cap means one thing. You will have to pay much less than if the loan servicer took your overall income into account. Thus, PAYE introduced an additional layer of protection against forbearance.

Student Loan Repayment Plans

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What You Should Know About Pay as You Earn Before You Apply

The most crucial factor to take into account is the date restrictions. You should have become a borrower after 1 Oct. 2007, and have had a disbursement of a Direct Loan after 1 Oct. 2011. Note that your first PAYE payment must be less than a standard ten-year payment you would’ve made toward private student loans. You will ineligible for PAYE should you fail these requirements. The best piece of advice is to get in touch with your student loan servicers to learn more about eligibility. Turn to the loan servicer you work with or a specialist at your college’s administration. They should be able to explain to you the benefits of PAYE. 

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Income-Based Repayment 

As far as income-based repayment plans go, the Income-based Repayment Program has the most extensive history. This fact and several changes that occurred in the program over the years might find make it hard to navigate. Don’t worry. So many people have successfully gone through IBR that you can do it too! Many people will tell you that the income-based repayment plan is not as good as REPAYE or PAYE.

There might be some truth about these statements. The fact remains that IBR is still one of the most robust and most reliable plans out there. It has several great benefits for the borrower. Want an example? Well, how does it sound to have interest forgiveness on the first three years of any unpaid interest? All you need to do is enter the interest-based repayment plan for a subsidized portion of the loan. 

IBR Benefits

Borrowers, who have lower income or no income at all, typically find IBR to be the most suitable option. Payment on the interest is due every month no matter what your loan terms are, and this can add up to a significant expense. Due to Forgiveness on the interest that comes with IBR, borrowers who find themselves in financial hardship need not worry. They have three years to strengthen their finances.

The Income-based repayment program adds a layer of protection against predatory servicers. Another benefit for low-income workers is the monthly payment they will have to make in the IBR program. This payment cannot be more than 15% of the adjusted gross income over the poverty line for their family. Married couples who file income tax jointly can count on even lower payments if both spouses have borrowed from federal loan programs. 

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When Do I Consider Income-Based Repayment?

IBS is suitable for people who are experiencing financial hardships or partial financial hardship. Apply for it if you don’t see any improvement in your current financial situation (e.g., a significant increase in income) over the repayment period. Otherwise, you may still consider some of the other repayment options available to borrowers of federal money. IBR is yet a great way to have a chance to quickly pay off your federal student loans without fear of forbearance and other harassment from your servicer. Check your eligibility before applying to be sure you can qualify for this particular program. 

Standard Repayment

The title suggests what this federal student loan repayment plan is all about. The Standard Repayment program calculates the amount of money you contribute each month toward your debt like any other loan out there. It may very well be the easiest plan to qualify for regardless of the situation. It saves you a lot of time, discussions with loan servicers, and filling out paperwork. 

The first thing that you need to know about the Standard Repayment plan is that there are restrictions on the repayment period. You will have a pre-defined amount of time to manage your debt based on the amount of money you originally borrowed:

  • Less than $7500 in fewer than ten years
  • $7,500 – $9,999 in fewer than 12 Years
  • $10,000 – $19,999 in fewer than 15 Years
  • $20,000 – $39,999 in fewer than 20 Years
  • $40,000 – $59,999 in fewer than 25 Years
  • $60,000 or more in fewer than 30 Years

Consider your current income and potential future earnings when deciding. Go for the Standard Repayment plan only if you can be sure that it will not be a problem for you to pay off your debt in limited time. 

Three Reasons to Select the SR Plan

  1. You want to get rid of your debt as quickly as possible. Standard repayment will create a structure for this to happen in a way that is beneficial to the borrower and servicer alike. You need to have less than 30 years left on your debt term to qualify, but that should not be a problem. 
  2. Your annual income is too high for you to qualify for income-based repayment. This is not a bad thing at all because it means that you are doing reasonably well financially.
  3. The amount of your debt is low. You will be able to contribute relatively small monthly loan payments and still get rid of the debt quickly. This is much better than extending it unnecessarily under any of the other repayment plans.

Due to the very nature of standard repayment, interest rates are considerably lower than most other student loan repayment plans available today. It’s even more apparent if you compare it to the graduated program, for example. Its structure enables you to pay off your debt fully and quickly. What’s best is that even if you experience hard times in the future, there is a remedy.

You can contact a servicer and arrange to change the standard repayment plan to an income-based one. That allows a lot of flexibility. If your income is stable and your future looks bright, then there is little doubt which is the right choice for you. The thing with debt is that it’s best to get rid of it as quickly as possible. Standard repayment enables you to do that. 

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Graduated Repayment Plan

The structure and terms of the Graduated Repayment Plan are more or less the same as the Standard Repayment Plan. The most significant difference is that under GR, you pay only the interest in the first two years. Then you graduate to full repayment of your debt. That is the reason many people who start on the path of a promising career choose it. Even if they are not making so much money at the present moment, they think they will soon.

Graduated repayment allows them to get a repayment plan that will help them get rid of their “borrower” status as quickly as possible. At the same time, they do not suffer financial strain while they’re getting on their feet. Paying interest only means that in the first couple of years, you pay far less, and only then does your monthly payment rise. 

So Why Go For Standard Repayment At All, Instead of Opting Directly for Graduated Repayment?

The reason is straightforward. Under GR, you end up paying more. You will not start paying the principal until the third year of your loan term. It will take time to catch up, even if the debt-to-income ratio is in your favor.

If you do the math, you’ll realize you may end up paying significantly more. This is why you should opt for Graduated Repayment only if your circumstances demand it. It will save you some money in the short-term, but it is not the most viable long-term plan out there.

What If My Career Doesn’t Take Off?

Let’s say that you chose Graduated Repayment because you were counting on an increase in income in the next couple of years, but your plans didn’t work out. You have your monthly loan payments increased significantly, and there is no money coming in. Yikes!

Have no fear. The Student Loan Repayment Assistance programs are here for you. They will get you in contact with a servicer and help you arrange a transition to a discretionary income plan. It’s always preferable to plan for the best and prepare for the worst. 

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Income Contingent Repayment

There is one last type of student loan repayment plan: the so-called Income Contingent Repayment. It is a little more complicated than the rest of the repayment options because the calculation of your monthly payment and structure uses two formulas. The first one gives you a much lower monthly payment, while the second gives you a higher one. 

Formula number one gets your Adjusted Gross income above the poverty line (for your family) times 20% for an annual payment. It is crucial to notice that the loan size does not matter at all here. The second formula uses the amount of your debt plus an income factor and a constant multiplier. The federal government determines both. The values you receive from both formulas are then compared. Usually, you pay the lower amount but not always. If you’re still confused about the formulas of ICR, don’t worry – your loan servicer can provide further details. 

Who Is Best Suited for ICR?

Like the other repayment plans, certain people are more suited for Income Contingent Repayment than others primarily because of two formulas. If you find yourself in financial hardship, then this plan may be right for you. The lower value of the two calculations may provide you with the temporary relief needed to get back on your feet. Another reason is the hope for student loan forgiveness.

It is highly unlikely that under ICR, you will have paid off your debt at the end of the term. This circumstance can potentially make you eligible for student loan forgiveness. That is why many people who do not see themselves financially secure in the future opt for this particular plan. If you are in such a situation, you’re a perfect candidate. 

One Drawback

Like REPAYE, Income Contingent Repayment tends to be discriminatory toward married couples. The income of both spouses factors into the formula, thus resulting in a “spousal penalty.” If you are married, you may want to think twice before opting for Income Contingent Repayment.

A standard plan will provide you with lower monthly payments and more flexibility. Even if you do not reach the stage at which you receive loan forgiveness after 25 years, you will still be better off. Think about it. You will pay less each month. You can invest the money in other income-generating endeavors, such as the stock market or additional education and training. In the long-run, you will manage to get rid of your debt quicker and on your terms. 

Student Loan Repayment Plans

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Is It Possible to Change Your Student Loan Repayment Plan?

The short answer is yes, you can. There are two things to consider before you jump headfirst into it. The first one is if you find yourself in financial hardship and are looking for a way to lower your payments. The second one is the opposite. If you are making more money now and are likely to continue doing so, a change of plan can help you get rid of any debt faster. The sooner you pay your debt, the less money you spend on interest. 

On the other hand, extending the term of your loan usually means more expenses. Put simply, lowering your monthly payments now is a short-term solution but a bad long-term investment. You should think very carefully before you change student loan repayment plans.

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Signing Up

The process takes time but not as much as you may think. Naturally, the first step is to decide which new plan fits your needs and requirements. Carefully read about all the programs that are available to you. The US Department of Education has a Federal Student Aid Office. They can be very helpful because they have a particular repayment estimator that will assist you in the process of estimating your monthly payments.

You can compare the amount of money you will be spending on different programs. The repayment period under each plan is also a factor. Once you are sure that you will be doing the transition, it’s time to call your loan servicer. The good news – there is no scenario under which you will be required to pay to transfer. 

Be Aware of Scammers

If your servicer asks for a third-party fee, something is fishy. You should call the relevant authorities right away. Any legitimate loan servicer exists to assist you, not charge unnecessary fees. Explain to your loan agent what your wishes are, and they will give you a thorough consultation on the paperwork that you need to complete.

Federal student loan borrowers need to fill out an application form that explains in detail the reasons they wish an extended repayment plan. Income information is a detail you will need to share with the federal government to get approval for a transition to another repayment plan. You can fill all of these forms online or ask for hard copies to complete.

Things to Keep in Mind

It is essential to keep in mind that the transition can take a lot of time in certain situations. It can be months before the process is over, which is why you should confirm the date for your next payment. As you know, if you miss even one monthly payment on your student loan, your credit score will suffer. A bad credit score will make it harder to take out another loan, such as one for a car.

Another thing you need to be sure about is whether you will be staying with your current servicer. In the majority of cases, you will not have to switch to another loan servicer to transition from one student loan repayment plan to another. In the rare instances when this is necessary, you may have to update auto-payment procedures. 

Can I Change Plans More Than Once?

There is no limit to the number of times you can change your federal loan payment plans. You can do it as often as you need. Also, you will not have to pay for the service itself. You may, however, end up with more payments to make than a financially-sane person would like. Each time you change a plan, you will suffer a capitalization on your outstanding interest. 

Simply put, your interest from now on will accrue on a higher balance. There is, however, one way to avoid that. Once you start making more money, pay more toward your principal loan balance each month. This way, you will decrease the overall debt amount, and other repayment options will then be available.

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What About Refinancing?

You can refinance your current student loan in the same way you refinance an auto loan. The question is whether it is worth it doing? Many people believe that the cons outweigh the pros. For one thing, if you refinance your student loan, you will no longer be eligible for Public Service Loan forgiveness. You can kiss income-based repayment options programs goodbye too.

But this might not matter to you at all, especially if you were ineligible for student loan forgiveness in the first place. There is the question of private student loans too. Those do not enjoy the benefits of money received through federal programs. If you are a borrower from a private company rather than the federal government, then refinancing may very well be the best way to go. That’s especially true if you are looking for lower loan payments.

Just keep in mind that private student loans are just a little over $65 billion (compared to $1.5 trillion in federal student loans). Therefore, it is unlikely that you would fall under this category. It is strongly advised to refrain from refinancing student loans if you a borrower from the government. Look at the repayment options all plans offer, and transition to one that will help you get back on your feet. It is not that hard, and your servicer should be more than happy to assist you. 

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Final Notes

Student loan repayment programs exist to help you repay your debt efficiently. Both you, as a federal student, as well as the government, benefit from this process. You get an education, and the government gets their money back with interest. It’s helpful to keep in mind that the government wants you to succeed; it’s in the best “interest” of the country. This is why they continually create and improve repayment plans – they want to protect their investment. So, don’t be afraid of this “good debt” because your future and the future of this nation depend on it! 

Have you found the best and fastest way to get rid of student loans? Is REPAYE far superior to PAYE? Don’t hesitate to leave a comment below.


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