Your Ultimate Guide to Student Loan Repayment Plans — PAYE, REPAYE & More

Your-Ultimate-Guide-Student-Loan-Repayment-Plans

For 2019 college graduates, the average student loan payment is a nauseating $393 per month.

For many, that payment — or even more! — is simply too high to handle. With expenses like rent, transportation, healthcare, and groceries, student loan payments are often unaffordable.

Imagine a much more manageable monthly payment — one that you don’t struggle to afford. A payment that frees you up to enjoy your life, and that can even be taken out of your bank account automatically without giving you a recurring heart attack.

If you’re struggling with how to pay off student loans, you should know that help is available. Whether you have federal or private student loans, here’s what you need to know about each student loan repayment plan and which option can be perfect for you.

Federal student loan repayment plans

If you have federal student loans, there are four main student loan repayment options available to you:

1. Standard Repayment

The Standard Repayment Plan is the default repayment option for federal student loans; it’s what you’re automatically enrolled into. You’ll have a fixed monthly payment and pay off your loans within 10 years, and it’s the most simple and basic of repayment plans.

In general, you’ll pay less in interest charges under a Standard Repayment Plan than you would with other options.

All borrowers are eligible for Standard Repayment.

2. Graduated Repayment

Under a Graduated Repayment Plan, your payments start off quite low and more manageable. But every two years, your payments will increase. After 10 years of payments, your loans will be completely paid off.

Despite paying off your loans in 10 years, you’ll pay more in interest charges with a Graduated Repayment Plan than you would with a Standard Repayment Plan.

This can be a smart option for recent college grads early in their careers, who don’t have a high income yet but should start seeing increases as work experience grows.

All borrowers are eligible for Graduated Repayment.

3. Extended Repayment

With an Extended Repayment Plan, the loan servicer extends your repayment term to 25 years. Your payments can be fixed or graduated, and this option can lower your monthly payments substantially if you’re really struggling to make ends meet.

However, because of the longer term, you’ll pay more in interest charges than you would with a 10-year repayment plan.

Only borrowers with more than $30,000 in outstanding federal Direct Loans are eligible for an Extended Repayment Plan.

4. Income-driven repayment (IDR) plans

Unlike the other federal repayment options, IDR plans are dependent on your income and family size. In some cases, you could even qualify for a payment as low as $0, meaning you won’t have to make payments and you won’t become delinquent on your loans.

For those who qualify, IDR plans can, in certain situations, make a significant dent in how much of your loans you actually pay back — while reducing your monthly payments. Generally, the borrowers who benefit most from staying on these plans long-term have a high student loan balance relative to their income.

There are four IDR plans available:

  • Income-Based Repayment (IBR): For borrowers who took out loans after July 1, 2014, your monthly payment will be 10% of your discretionary income, and your repayment term will be 20 years.
  • Income-Contingent Repayment (ICR): Your payment will be the lesser of 20% of your discretionary income or what your fixed payment would be with a 12-year repayment term.
  • Pay As You Earn (PAYE): Your payment is set at 10% of your discretionary income, but will never exceed what your payment would be under a Standard Repayment Plan. The repayment term is 20 years.
  • Revised Pay As You Earn (REPAYE): With Revised Pay As You Earn, your payment will be 10% of your discretionary income. If your loans were for an undergraduate degree, your repayment term is 20 years. If the loans were for a graduate degree, your repayment term is 25 years.

Payments made under an IDR plan also count as qualifying payments if you’re pursuing Public Service Loan Forgiveness.

However, there’s another way to get loan forgiveness, regardless of your profession or employer. If you sign up for an IDR plan and still have a loan balance after making payments for 20 to 25 years (depending on your repayment plan), the remaining loan balance is discharged. The forgiven balance is taxable as income, but it still can help you save thousands of dollars.

Not all federal loans are eligible for IDR plans; only Direct Subsidized and Unsubsidized Loans, PLUS Loans made to students, and Direct Consolidation Loans for students qualify. For Parent PLUS Loans, the only IDR plan you can qualify for is income-contingent repayment. However, you must consolidate your loans first with a Direct Consolidation Loan to be eligible.

Private student loan repayment plans

When you take out a private student loan, it’s important to know that your repayment options are dependent on what lender you choose. Repayment terms and interest rates can vary from lender to lender, so it’s a good idea to shop around and compare lenders. Generally, you can choose loan terms between five and 20 years in length.

Most private lenders offer the following student loan repayment options:

  • Immediate repayment: With this repayment plan, you start making full payments — covering both the principal and interest charges — while you’re still in school. Your payments will begin right after the loan is disbursed. Using an immediate repayment plan will help you pay less interest than any other option.
  • Interest-only payments: Under an interest-only payment plan, you only pay the interest that accrues while you’re in school; you don’t have to start making full payments against the principal until you graduate. This approach won’t save you as much lifetime interest as immediate repayment, but you’ll pay less in interest than you would if you used a deferred payment plan.
  • Deferred payments: With deferred payments, you don’t start making payments on your loans until you graduate from college. While you’re in school, interest accrues and is capitalized (added to your initial loan balance) after you graduate. Deferred payment plans are the most expensive of your repayment options.

Other ways to repay student loans

It can be overwhelming to have multiple student loans while juggling different loan servicers, repayment plans, and monthly payments.

If you’re stressed out by your debt, consolidating or refinancing are two more ways to repay student loans and simplify your financial life.

Direct Consolidation Loan

A Direct Consolidation Loan is only for federal student loans. When you take out a Direct Consolidation Loan, you combine all your federal student loans together. You can choose a new repayment term, and can select a term as long as 30 years to reduce your monthly payment.

The interest rate on a Direct Consolidation Loan is the weighted average of your current loans’ rates, so consolidating your debt is unlikely to help you save money.

Direct Consolidation Loans are eligible for both IDR plans and PSLF, so you can combine your loans and streamline your debt without losing those benefits.

Student loan refinancing

If you have private student loans or a mix of both private and federal loans, another option is student loan refinancing. With this strategy, you take out a loan from a private lender and use it to pay off your current debt.

By refinancing your loans, you consolidate them together. And, if you have good credit and a steady income, you can qualify for a lower interest rate and save thousands over the course of your loan repayment. Or, you can extend your repayment term to make your payments more affordable.

If you decide that student loan refinancing is right for you, use Purefy’s Compare Rates tool to get quotes from top lenders with no credit check required.

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