Repaying Student Loans

There are several ways to repay federal Stafford loans. Each one fits a slightly different financial situation, so you need to think seriously about what you can afford when you pick a repayment plan and how much repayment will cost. You can find more detailed information about these options at studentaid.ed.gov.

Remember that the best plan for you isn’t necessarily the one with the lowest monthly payments—or the one with the highest payments and the shortest term, for that matter. Think about what you can afford now, and what you can reasonably expect to pay in the future. You’ll find there are slight differences among the longer-term repayment options. Some of them include provisions that allow the balance of your loan to be discharged or forgiven under certain circumstances.

And when you chose a repayment plan, you’re not making an irrevocable decision. You can always switch plans if you need or want to. It’s generally easy to qualify provided you are up to date with your payments under your existing plan.

Standard repayment plan – This plan requires you to make fixed payments of at least $50 a month for a set period of time up to ten years. The amount of each payment and the time that repayment takes depends on how much you’ve borrowed. This plan will probably let you pay back your loan quickest, and cost you the least overall, provided you have the money to keep up with the payments. One warning sign is if your monthly payments are greater than 8% to 10% of your gross monthly income. If they are, you might consider one of the more flexible but longer alternatives. You can always prepay your loan at any time if you’re able to afford it.

Graduated repayment plan – This plan might be the best choice for you if you’re not making a lot of money right now, but you’re expecting to have a higher income in the near future. Your payments are due over a fixed period of up to ten years. Your payments start out small and increase, generally every two years. You’ll never pay less than the interest that’s due. This plan may cost a little more than the standard plan but may be a wise choice if your career seems on track.

Extended repayment plan – This plan requires fixed or graduated payments over a term that lasts up to 25 years. You must owe more than $30,000 in loans you’ve taken either from private lenders through the federally insured Federal Family Education Loan (FFEL) program or through the Direct Loan program to qualify for this plan. If you have both types, you can’t combine them to reach the $30,000 threshold. While your payments are lower than with a standard or graduated plan, this method will cost you more overall because you are paying interest for a longer time.

Income-contingent repayment plan – This plan applies to federal Direct Loans and sets your monthly payments based on your income, which can give you some security if you have a volatile cash flow. What you pay each year rises or falls based on what you make, and there’s no set minimum payment. If your payments aren’t large enough to cover the interest that’s due, the unpaid amount is capitalized and added to your principal. You can take up to 25 years to repay under this plan. After that, any amount that’s still unpaid may be discharged, although you may have to pay income taxes on the amount that you’re not required to pay. Graduate and professional school borrowers may use this plan as well.

Income-based repayment plan – This plan bases your monthly repayment amount on your income and family size and limits what you must pay annually. After you make payments for 25 years, you may qualify to have the remaining balance canceled. In addition, if you work in a qualifying public service job, you may qualify to have your loan forgiven.

This plan has some features in common with a program that began in 2007 that allows your loans to be forgiven if you work in a broadly defined public interest job, including teaching and some medical and legal work. In that case, if you make payments for ten years, any remaining balance is forgiven and no tax is due on the unpaid amount. To participate, though, you must move any loans you took through the FFEL program to the Direct Loan program.

In addition, if you have an existing FFEL loan, you may be eligible for the income-sensitive repayment plan. This plan adjusts your monthly payments every year, based on your annual income. As your income goes up, so do the repayment amounts. The repayment period for this plan lasts up to 10 years, though it may be extended to 15 years under special circumstances. No new FFEL loans are being made, however.

You have ten years to pay off a Perkins loan, by making the payments to your school or the agent it selects. There are no repayment options. The amount you owe each month, which must be at least $40, is based on the total amount you owe.

Parents or independent students with Parent Loans for Undergraduate Students (PLUS) generally must begin repayment immediately after the loan has been disbursed.