As you begin your financial journey post college, paying back your student loans will play a big part in tackling your finances. Repayment options are important topics to consider when you are planning for life after college. Also, important to note is the end of the three year repayment pause post-pandemic. Interest will resume for all federal student loans in September of 2023, with repayments due in October of 2023. Let’s take a closer look at some of your options.
What are the options for repaying your loans?
Standard Repayment Plan: This plan allows you to pay off your loans in 10 years with a fixed monthly payment.
The monthly payment amount under the Standard Repayment Plan is determined based on the total amount of the borrower’s loan balance and the interest rate on their loans. The monthly payment amount is calculated in such a way that the loan balance is paid off in full by the end of the 10-year repayment period. This is the default repayment plan for most federal student loans, and you will most likely be auto-enrolled in this plan.
The main benefit of the Standard Repayment Plan is that it allows for borrowers to pay off their loans relatively quickly and save money on interest in the long run. One problem as a result of this is relatively high payments, making it difficult to budget for the monthly payment post-graduation when salaries are usually at their smallest.
Graduated Repayment Plan: This plan starts with lower monthly payments that increase every two years for a total of 10 years.
The Graduate Repayment Plan is a type of loan repayment plan that is available recent college graduates. It is designed to provide borrowers with a lower monthly payment in the early years after graduation with the amount increasing over the years. The initial monthly payment is set lower than the standard plan, making it more financially accessible for recent college grads.
The monthly payment amount under the Graduate Repayment Plan gradually increases every two years, which means that borrowers will end up paying more in interest over the life of the loan. However, the lower monthly payments in the early years after graduation can help students to better manage their finances during this time.
The new SAVE (Saving on a Valuable Education Plan) – formerly called REPAYE: This plan is replacing the Revised Pay as You Earn Plan. Borrowers enrolled in the REPAYE plan will be automatically enrolled in the SAVE plan. Some benefits of the SAVE plan will go into effect in the summer of 2023, more will be rolled out in the summer of 2024.
Payments in the SAVE plan will be 10% of your discretionary income. Payments are recalculated each year based on income and family size. If you are making monthly payments in this plan, your balance will not grow due to unpaid interest. This loan application is redesigned and can be reached through the Student Aid site and the IDR application. Loan forgiveness under this plan will be taxable.
Income-Driven Repayment Plans: These plans adjust your monthly payments based on your income and family size. There are four different income-driven repayment plans available: Pay As You Earn or PAYE, Income-Based Repayment Plan or IBR, Income-Contingent Repayment or ICR, SAVE.
Under the Income-Driven Repayment Plans, the borrower’s monthly payment amount is calculated as a percentage of their discretionary income, the difference between their adjusted gross income and 150% of the federal poverty guideline for their family size and state of residence. The percentage varies depending on the specific type of Income-Driven Repayment Plan, but generally ranges from 10% to 20% of the borrower’s discretionary income.
One of the key benefits of the Income-Driven Repayment Plans is that they allow borrowers to make lower monthly payments based on their income and family size. Additionally, if the borrower’s income is low enough, they may qualify for a $0 monthly payment, which means that they won’t be required to make any payments on their loans. Another benefit of the Income-Driven Repayment Plans is that borrowers who make qualifying payments for a certain period of time, typically 20 to 25 years, may be eligible to have their remaining loan balance forgiven. However, it’s important to note that any amount forgiven under this plan may be taxable. All but the IBR are good options if you plan to pursue Public Service Loan Forgiveness.
Extended Repayment Plan: This plan requires more than $30,000 in loans. Payments will be planned so to pay off loans in 25 years with either fixed or graduated payments.
What is Loan Forgiveness?
Loan forgiveness is a program that cancels or reduces the amount of debt you owe on your student loans. These programs are available to borrowers who meet certain eligibility requirements, such as working in a particular field or for a specific employer. This is a great option to explore before you start paying off your debt.
There are several loan forgiveness programs available for college students, including the Public Service Loan Forgiveness (PSFL), Teacher Loan Forgiveness, and Perkins Loan Cancelation. These programs have their own eligibility requirements, so doing your own research is essential! If you go qualify for one of these programs, it can be a great way reduce the amount you owe. If you look to take part in one of these plans, be sure to select a repayment option that is eligible.
What about Biden’s Loan Forgiveness Program?
Biden’s one-time loan forgiveness program was blocked by the Supreme Court in June 2023. Even if you were approved to be a part of this program, you’ll need to look at other options. Check out studentaid.gov/debtrelief for additional information.
Loan forgiveness and repayment options are important to consider as you move towards life after college. It’s important to research your options and find the best plan for your specific financial situation and goals. Before deciding on an option, you can use the loan simulator tool on the Department of Education website to help find the option that best fits your needs.
https://studentaid.gov/loan-simulator/
https://studentaid.gov/manage-loans/repayment/plans
Also keep in mind, private loans don’t typically offer income-driven repayment plans, but they may offer options to help reduce payments. Contact your lender to ask about options.
Look for our next blog about refinancing and loan consolidation to learn how these can impact your repayments.