Standard Federal Student Loan Repayment Plans v. Income-Based Plans

Learn about the pros and cons of standard repayment plans and income-based plans for your federal student loans.

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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.

Standard Repayment Plans

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.

The Standard 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.

The Graduated Repayment Plan

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.

Extended Fixed and Extended Graduated Plans

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:

  • Extended Fixed: $258 per month (but you will pay $24,000 more in interest than under the ten year plan)
  • Extended Graduated: $200 per month for the first two years; $388 per month in the 25th year (but you will pay $23,000 more in interest than under the ten year plan)

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.

Income-Based Plans

The Department of Education offers three income-based plans:

  • Income Contingent Repayment
  • Income Based Repayment, and
  • Pay as You Earn plan for post-2007 borrowers.

(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:

  • Your monthly payment is set by your actual income and family size, not by the amount of your loan. It is reset every year based on the information in your tax return.
  • You have to apply and receive approval to repay under these plans. Some plans require that you have a “partial financial hardship.”
  • You may end up with forgiven debt at the end of your repayment term under these plans. These plans use repayment terms of between 20 and 25 years, and you may have a balance left over after the term ends. If so, that debt is forgiven. However, forgiven debt has tax consequences—it must be included in your income for the year it is forgiven. If $10,000 in debt is forgiven and you are in the 25% tax bracket, your tax bill could increase by up to $2,500. (To learn more, see Tax Consequences for Forgiven Debt.)

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:

  • Income-Continent Repayment: $384
  • Income-Based Repayment: $183
  • Pay as You Earn: $122

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.)

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