The six-month grace period for education loans is coming to an end and repayment is beginning for students who graduated or left college this past spring. As education loans enter repayment, borrowers may be able to choose from a variety of repayment plans. Moreover, the variety of plans depends on whether they have private or federal loans. Review the plans below and speak with your loan servicer to help evaluate what plan works best for your budget and financial goals.
Standard Repayment Plan
All federal student loan borrowers are automatically enrolled in this plan as loans enter repayment. Payments are a fixed monthly amount, based on the loan amount and interest rate. Notably, this loan has a repayment term of 10 years
- Pros: You’ll pay the least in overall cost of the loan compared to other plans.
- Cons: You’ll have higher monthly payments.
Graduated Repayment Plan
A graduated repayment plan offers a 10-year repayment term. However, the payment amount gradually increases over the life of the loan, approximately every two years.
- Pros: Lower monthly payment at the start of a career. Payments increase as income grows.
- Cons: Depending on the situation, higher monthly payments later on may be unaffordable.
Extended Repayment Plan
An extended repayment plan extends the loan repayment term as much as 25 years. It also allows the borrower to select either standard or graduated payments.
- Pros: You’ll have a lower monthly payment to standard repayment.
- Cons: The overall cost of your loan will be higher with a longer repayment plan.
Income-Based Repayment (IBR)
This plan is for borrowers with a high debt-to-income ratio. There is a 10% cap on monthly payments, which are based on monthly income. With updated income or family information, payments will be adjusted.
- Pros: The outstanding loan balance is forgiven after the 20-year repayment term.
- Cons: The overall cost of the loan may be higher than the standard repayment plan. The borrower might have to pay taxes on the forgiven loan amount.
Income-Contingent Repayment (ICR)
All borrowers can take advantage of this plan. This plan adjusts monthly payments based on a fixed payment over 12 years (modified for income) or a flat 20% of income, whichever is least. Adjustments to the payment amounts occur when the borrower updates income or family size.
- Pros: Any outstanding balance after the 25-year repayment term is forgiven.
- Cons: The overall cost of the loan may be higher than the standard repayment plan. The borrower might have to pay taxes on the forgiven loan amount.
Pay As You Earn Repayment (PAYE)
PAYE is an updated version of the Income Based Repayment plan. There is a 10% cap on monthly payments, which are based on monthly income. With updated income or family information, payments will be adjusted.
- Pros: Any outstanding loan balance after the 20-year repayment term is forgiven.
- Cons: The overall cost of the loan may be higher than the standard repayment plan. The borrower might have to pay taxes on the forgiven loan amount.
Revised Pay As You Earn Repayment (REPAYE)
This plan is available to all borrowers. There is a 10% cap on monthly payments, which are based on monthly income. With updated income or family information, payments will be adjusted.
- Pros: Any outstanding balance after the 20-year repayment term is forgiven (25 years for graduate schools loans).
- Cons: The overall cost of the loan may be higher than the standard repayment plan. The borrower might have to pay taxes on the forgiven loan amount.
Federal and Private Loan Repayment
Borrowers with multiple federal or private student loans may be able to benefit from refinancing their loans into one loan term and payment. Refinancing federal student loans voids the above federal repayment options. Knowing this, it’s important to carefully evaluate every option available to you.