Explore various student loan repayment plans to reduce interest and pay off your loans faster. Find the plan that fits your budget.
Repaying student loans can seem like a long (long!) road, but having the right road map can help.
Student loans are a fact of life for many, but how those loans are handled can make the difference between a successful or dismal financial future. Every student loan borrower needs to know about student loan repayment plans. However, these days, it is pretty difficult to choose the right one among many. Now, let us look at these various repayment plans individually so that you can choose the plan that suits your specific financial condition.
Understanding Options on Your Student Loan Repayment Plans
The fact is, there is no one right answer on how to repay your student loans. It will depend on things like your income, financial goals, and how quickly you want to get rid of that debt! The four primary repayment plans available to nearly all federal student loan borrowers are as follows: Standard Repayment, Income-Driven Repayment, Graduated Repayment, and Extended Repayment. All have benefits and drawbacks, and you need to know how each works before you choose one.
Standard Repayment Plan: This Is the Cheapest Way
The Standard Repayment Plan is typically the best option if your goal is to pay down your loan quickly and minimize interest over time. This plan is based on a fixed amount over 10 years. Your payments will be higher than other plans, but the biggest benefit here is that you will pay off your loan faster and lower the overall interest you pay.
The predictability of this plan is why it works well for a lot of people. That means you will know exactly how much you will need to pay each month, and therefore you will find it much easier to budget. As long as you can manage the payments, staying with this plan will be the cheapest way to pay off the loan.
A Solution For Borrowers Who Need Repayment Help
Income-Driven Repayment Plans can be a lifesaver if your income is lower, making it more difficult to meet standard monthly payments. These plans vary your monthly payment, as well as the length of your loan (often 20 or 25 years), as a portion of your income. Any remaining debt may be forgiven at the end of the repayment period.
Income-driven plans include Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and Saving on a Valuable Education (SAVE). The benefit of these options is that it more closely ties payments to your earnings. But it can also mean you will end up paying more on the debt altogether because you are spreading out the payments over a longer period.
Income-driven plans make payments smaller, but you have to think long-term. Interest is calculated every month, and over years of payments, you can end up owing more money. Moreover, discharged debt can be treated as taxable income, which could translate into a hefty tax bill once your loan is discharged.
Graduated Repayment: Smaller Payments that Rise Over Time
If you anticipate an income increase in the future, then the Graduated Repayment Plan is suitable for you. With this plan, you begin with low payments that grow every other year. It offers a little flexibility in the beginning, making it a bit more manageable while you get your feet on the ground.
But those payments start as lower, initial payments before they can increase considerably. If a significant amount of time goes by before those higher payments happen, you’ll want to be ready for them. It could cost you more in interest than the Standard Repayment Plan, but it can be good if you need just a bit of extra time to get your income ready.
Extended Repayment: Taking Years to Pay It Off
With the Extended Repayment Plan, your repayment term can stretch as long as 25 years. If you have more than $30,000 of federal student loans, this plan is an option for you. You can select from either fixed payments or graduated payments, which start low but grow over the years.
Although this plan may make your monthly payments cheaper, it usually results in more interest being paid over the term of the loan. However, the Standard Repayment Plan is 10 years, so you will be paying a lot more in total with the Extended Repayment Plan. This is why you need to balance the comfort of a lower monthly payment with a possibly higher long-term cost in the comparison process.
Finding the Right Plan for Yourself
The right student loan repayment plan varies according to your financial situation and your future plans. If you can pay a higher monthly payment and want to pay as little interest over the life of your loans, then the Standard Repayment Plan is usually the way to go. Under an income-driven plan, you might get just the balance you need to make those monthly payments more manageable.
Think about your future aspirations too. Standard or income-driven plans might be the right choice if you want to pay off your loan quickly or benefit from loan forgiveness programs. But if you find yourself in a situation that requires you to lengthen the repayment period, then consider options such as Graduated or Extended Repayment.
After all, regardless of which plan you choose, the most important aspect of your student loan debt management comes down to staying well-informed. With an awareness of the advantages and disadvantages of each repayment option and a clear picture of your own financial circumstances, you can choose the path that enables you to pay off your loans while still looking out for your financial future.
