When it is time to repay your federal student loans, you have several different repayment plans you can choose from. The Department of Education offers plans in two groups: standard repayment plans and plans based on your income. Each group of plans has advantages and disadvantages. If you have the income to make the payments, standard repayment is simpler and faster. Income-based plans are somewhat more complex, but a better choice if you have a low income.
Below we outline the various standard repayment plans and income-based student loan repayment plans available for federal student loans. These plans are not available for private student loans. (Learn the difference between federal and private student loans.)
The Department of Education has descriptions and calculators for each plan on its website, studentaid.ed.gov.
The Department of Education offers several standard repayment plans that use a ten to 25 year repayment period. Its website (listed above), provides monthly payment information for a sample loan of $40,000 at 6% interest for each type of repayment plan.
This is a very simple plan: you make the same monthly payment every month for up to ten years. If you have steady employment and want to say goodbye to your loans as soon as possible, this is a good choice. For the sample loan of $40,000 at 6% interest, your monthly payment would be $444.
With this plan, the repayment term is still ten years, but the payment is lower in the early years and rises in later years. The highest payment amount cannot be more than three times the lowest amount. For the sample loan, your monthly payments in the first two years would be $254. Your monthly payments in the last two years would be $761. If you have steady employment and can count on regular cost of living increases or raises, this could be a good choice.
If you owe more than $30,000, you can also stretch out the repayment term up to 25 years under either the Standard or Graduated plans. A longer repayment term means you will pay more total interest, but your monthly payments will be significantly lower. For the sample loan, the monthly payments are:
The extended options are only available for loans that started after October 7, 1998. If you need the low payments of the extended plans, it is likely that an income-based plan is a better option.
The Department of Education offers three income-based plans:
(For details on each of these plans, see What's the Difference Between Income Contingent Repayment Plans and Income Based Repayment Plans?.)
The Department of Education’s income-based repayment plans differ from standard plans in three important ways:
Using the sample loan of $40,000 at 6% interest, for a family of four with $50,000 in annual income, the monthly payments for each income-based plan are as follows:
As you can see from the examples, the monthly loan repayment amount for the same loan can range from $122 per month to $444 per month depending on the repayment plan you choose. Take the time to consider which plan is right for your household based on repayment term, monthly payments, and total loan interest.
(If you are struggling to repay your student loans, visit our Student Loan Debt area for more articles.)