Confused? Overwhelmed? You’re Not Alone!
The process of navigating different repayment options can quickly become confusing and overwhelming.
We’re going to lay out your options of the different student loan repayment plans and tools that’ll help you find the right one for you.
Find Out What Type of Loan You Have
The first thing you need to know is what kind of student loan you have and when you took it out. There are two main types of loans: federal and private.
To find out if you have federal student loans, visit the U.S. Department of Education’s central database for student aid to find out. Visit the “Financial Aid Review” section of the site and enter in your personal information to access a list of all federal loans made to you. When you click each loan you can see who the loan servicer is (they collect bills from you), and what company or office you’ll work with to enroll in the repayment plan you’ve chosen. The most common name of federal student loans are Direct, Stafford, Grad PLUS, and Perkins. Be sure to pay attention to the date of when your loans were issued, because the date impacts what kind of repayment plan you are eligible for.
To find out if you have private student loans, contact your school’s financial aid office, which should be able to confirm your loan information. If your school doesn’t have documentation of your private student loans, you can request a free credit report from Annual Credit Report, which will provide you a list of private student loans in your name (you are entitled to one free credit report from this service every year). Private (non-federal) student loans, are typically called private or alternative and are issued by a bank, credit union, your school, a state agency or a nonprofit organization.
Make Sure You’re Not in Delinquency or Default
It’s also important to know if your loan is in delinquency or default, as that status will impact your available options. Learn more about delinquency and default »
Types of Repayment Plans
Income-Driven Repayment Plans
Income-driven repayment plans are repayment plans where your monthly payment is based on your adjusted gross income and family size, rather than how much you owe. Your payments through these plans can be as low as $0 a month and can even cancel your remaining student debt after 20 to 25 years. It’s important to know that any balance forgiven will be treated by the IRS as taxable income.
If you want to pay off your student loan more quickly, enrollees in these income-driven repayment plans are not penalized for overpayments. If you switch out of an income-driven repayment plan back to a Standard Repayment Plan, you will have to pay any unpaid interest as a fee. For that reason, it makes the most sense to remain in an income-driven repayment plan because the amount you pay will not exceed a Standard Repayment Plan amount — unless you are enrolled in Revised Pay As You Earn — and it gives you more flexibility for managing other expenses.
Income-based repayment is available to the widest range of student loan borrowers. IBR limits what you pay to 15 percent of your discretionary income, and after 25 years of payments, any remaining balance is canceled. The most you’ll ever pay in this plan is capped at what you would be paying in a Standard 10-year Repayment Plan. You’re eligible for IBR if you have a Direct Loan or Federal Family Education Loan (FFEL) and can show partial financial hardship.
Pay As You Earn (and “New Income-Based Repayment” for loans taken out after July 1, 2014)
Pay As You Earn limits what you pay to 10 percent of your discretionary income, and after 20 years of payments any remaining balance is canceled. The most you’ll ever pay in this plan is capped at what you would be paying in a Standard 10-year Repayment Plan. You’re eligible for this plan if you took out your first direct loan after October 1, 2007. You need to have a Direct Loan and partial financial hardship to be eligible.
Revised Pay As You Earn
Revised Pay As You Earn (REPAYE) is different from other income-driven repayment plans. It allows you to limit your monthly student loan payment to 10 percent of your household’s discretionary income. This means, if you are married, unlike other income-driven repayment plans, your payment will be based on the combined income and loan debt of you and your spouse regardless of whether you file a joint or separate Federal income tax return. There is no payment cap to REPAYE, so the amount you owe every month will keep going up with your household discretionary income. Loan cancellation will incur after 20 years if you have only undergraduate loans and after 25 years if you took out any loans for graduate school.
You’re eligible for an Income-Contingent Repayment plan if you have a Direct Loan. Income-Contingent Repayment limits your monthly payment to the lesser of these two options: 20 percent of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income. This is the only income-driven repayment plan available for Parent PLUS Loan borrowers after they have consolidated into a Direct Loan. After 25 years of payments, any remaining balance will be cancelled.
Standard Repayment Plan
Pros: You’ll pay the least amount of interest in this plan. You’ll pay your loan off the quickest in this payment plan.
Cons: If you’re trying to take advantage of Public Service Loan Forgiveness, there would be no remaining balance to forgive.
Graduated Repayment Plan
Pros: You will start with low monthly payments.
Cons: If your income doesn’t increase like you expected, your monthly payments can become extremely expensive. This type of repayment plan is not eligible for Public Service Loan Forgiveness.
Extended Repayment Plan
Pros: You will pay a smaller amount every month than you would in the Standard or Graduated Repayment Plans.
Cons: You will pay much more over the life of the loan than you would in other repayment plans, and it will take longer to pay back the loan. This type of repayment plan is not eligible for Public Service Loan Forgiveness.