As a student loan holder, it’s crucial to plan your repayment strategy, especially as the payment hiatus draws to a close in a few months.
The Biden administration announced that “pause” will end June 30. This means student loan interest will recommence on September 1, 2023, with payments beginning in October.
Under the federal guidelines, borrowers can expect a billing statement or other notification at least 21 days prior to the due date. This will include information on the payment amount and the due date.
StudentAid.gov offers various repayment plans aimed at making your payments more manageable. These can provide you with additional time to repay your loans or may be income-dependent. To get a preliminary understanding of which plans you qualify for, use the Loan Simulator to estimate your monthly and overall payments.
Following this, you can reach out to your loan servicer to discuss your options or modify your current repayment plan. You can access information on all your federal student loans and find your loan servicer by logging into “My Federal Student Aid.” Remember, private student loans are not included under these federal guidelines.
Repayment Plans Offered by the Federal Government
1. Standard Repayment Plan
The Standard Repayment Plan is universally available to all borrowers, providing a structure of fixed monthly payments calculated to ensure complete repayment of your loans within a decade. The loans that qualify for this plan include Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, all PLUS loans, and all Consolidation Loans (Direct or FFEL).
Typically, this plan results in lower overall repayment costs compared to other alternatives. However, those pursuing Public Service Loan Forgiveness (PSLF) may find this 10-year repayment plan less beneficial, as it may not align optimally with their forgiveness goals.
2. Graduated Repayment Plan
Open to all borrowers, the Graduated Repayment Plan is designed with flexibility in mind. Initial payments are set lower, becoming progressively larger, usually with increases every two years. This structure guarantees your loans will be paid off within a decade.
The types of loans that are eligible under this plan include Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, all PLUS loans, and all Consolidation Loans (Direct or FFEL).
However, this plan often results in higher total repayment amounts compared to the 10-year Standard Plan. Also, it’s important to note that this plan generally does not qualify for Public Service Loan Forgiveness (PSLF).
3. Extended Repayment Plan
The Extended Repayment Plan is specifically designed for Direct Loan borrowers who have accumulated over $30,000 in outstanding Direct Loans. This plan offers flexibility with payment amounts that could either be fixed or increase over time (graduated) and ensures that your loans will be completely paid off within a 25-year period.
This plan accepts several types of loans, including Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, all PLUS loans, and all Consolidation Loans (Direct or FFEL).
The monthly payments under this plan will be lower than those under the 10-year Standard Plan or the Graduated Repayment Plan. However, be aware that you will likely pay more in total over the course of this extended term compared to the 10-year Standard Plan. Also, the Extended Repayment Plan typically does not qualify for Public Service Loan Forgiveness (PSLF).
4. Revised Pay As You Earn Repayment Plan (REPAYE)
Deciphering the Revised Pay As You Earn Repayment Plan (REPAYE)
The Revised Pay As You Earn Repayment Plan (REPAYE) can be an attractive option for any Direct Loan borrower with an eligible type of loan. It offers a tailored approach to repayment based on your personal financial circumstances.
Your monthly repayments under this plan are adjusted to 10% of your discretionary income. These payments are recalculated every year based on your updated income and family size. It’s essential to keep your income and family size information up-to-date annually, even if there have been no changes. If you’re married, your spouse’s income and loan debt will also factor into the calculations, regardless of whether you file your taxes jointly or separately, although there are a few exceptions.
Should you still have an outstanding balance after 20 years (for loans taken out for undergraduate study) or 25 years (if loans were taken out for graduate or professional study), the remaining amount will be forgiven.
The eligible loans for REPAYE include Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans made to students, and Direct Consolidation Loans that do not include PLUS loans (Direct or FFEL) made to parents.
However, this plan often leads to higher total payments over time compared to the 10-year Standard Plan, and forgiven amounts may be subject to income tax. Despite this, the REPAYE plan is a strong contender for those in pursuit of Public Service Loan Forgiveness (PSLF).
5. Pay As You Earn Repayment Plan (PAYE)
To be eligible for this plan, you need to be a new borrower as of October 1, 2007, and you must have received a disbursement from a Direct Loan on or after October 1, 2011.
Under this plan, your monthly payments will be 10% of your discretionary income, but they will never exceed what you would have paid under the 10-year Standard Repayment Plan. These payments are recalculated annually based on your updated income and family size. You’re required to update your income and family size each year, even if there have been no changes.
Loans eligible for this plan include direct subsidized and unsubsidized loans, direct PLUS loans made to students, and direct consolidation loans, as long as they do not include PLUS loans (Direct or FFEL) made to parents.
This plan is tailored for individuals with a high debt-to-income ratio and is paid over 20 years.
While your monthly payment will never exceed the 10-year Standard Plan amount, you’ll generally end up paying more over time compared to the 10-year Standard Plan. Also, any forgiven loan amount may be subject to income tax. However, the PAYE plan is a sound choice for those seeking Public Service Loan Forgiveness (PSLF).
6. Income-Based Repayment Plan (IBR)
The Income-Based Repayment Plan (IBR) is specifically tailored for borrowers whose debt is significantly high in comparison to their income.
Under this plan, your monthly payments are contingent upon your discretionary income. They will constitute either 10% or 15% of this income, depending on the time of your first loan issuance. Importantly, the amount you pay will never exceed what you would have under the 10-year Standard Repayment Plan.
These payments are subject to annual recalculation, predicated upon your most recent income and family size information. Thus, it’s important to provide yearly updates on these metrics, regardless of any changes or lack thereof. Note that if you’re married, your spouse’s income or loan debt is considered only if you file a joint tax return.
If after 20 or 25 years (based on when you received your first loans) your loan hasn’t been paid in full, the remaining balance will be forgiven. However, you should be aware that this forgiven amount may be subject to income tax.
The IBR plan caters to several loan types including: Direct Subsidized and Unsubsidized Loans, Subsidized and Unsubsidized Federal Stafford Loans, all PLUS Loans made to students, and Consolidation Loans (Direct or FFEL) excluding PLUS loans (Direct or FFEL) made to parents.
While your monthly payment will never surpass the amount under the 10-year Standard Plan, it’s common to pay more in total over time under IBR. Additionally, any forgiven amount may be subject to income tax.
One Last Option
Federal loan repayment options are not for everyone, especially if you aren’t going for public loan forgiveness. In my case, refinancing all my student loans proved to be the best course of action. All my loans were consolidated at a much lower interest rate than what I would have paid with the federal plans. This approach not only reduced my monthly payments but also decreased the overall interest I would pay over the long term.
Now, it’s up to you to determine the best plan for repaying your student loans. But at least now, you’re equipped with knowledge of your options and an idea of where to start.
Good luck!
