You’ve got a mortgage to pay, child care to cover, groceries to buy — you’re tapped out. And yet you still have to find a way to make that student loan payment that comes due every month. I get it. I’ve been there myself.
Fortunately, if you have federal student loans, you have options. There are multiple repayment plans to choose from, including income-based options.
But it’s not as simple as choosing the one with the lowest payment. Choosing the best student loan repayment plan for you involves a handful of simple but crucial steps.
How to Choose the Best Student Loan Repayment Plan for You
Which federal student loan repayment option is best depends on your financial situation and goals. So follow this step-by-step process to settle on the right plan for you.
1. Know Your Options
Before deciding which plan is best for you, you have to understand the options. Federal student loans come with a wide variety of repayment plans.
Standard Repayment Plan
The standard is the default plan, meaning every student is automatically on this schedule when their loans enter repayment. Monthly payments are the same amount every month for 10 years until you pay off the loan.
Graduated Repayment Plan
Like the standard plan, the graduated plan gives you 10 years to repay your loans. But the payments start smaller in the beginning and increase in size every two years.
Extended Repayment Plan
Extending the loan term lowers your monthly payment by extending your repayment term up to 25 years. You can choose fixed or graduated payments.
Income-Driven Repayment Plans
Income-driven plans tie your monthly payments to what you make. There are four income-driven plans with slightly different eligibility requirements and benefits.
With the exception of one, each caps your payment at 10% of your discretionary income. While similar in that way, subtle differences may be important to some borrowers.
- Pay as You Earn. You must meet a financial hardship qualification to be eligible. If you do, the government covers interest on subsidized loans for three years. And if your income grows, your payments won’t be higher than you’d pay on the standard 10-year schedule.
- Revised Pay as You Earn. This plan is open to any borrower, regardless of income. The government also covers interest on subsidized federal loans for three years, but there’s no cap on the size of payments.
- Income-Based Repayment. There’s an income qualification for this one. But it caps payment size as long as you remain enrolled no matter how large your income grows.
- Income-Contingent Repayment. This least favorable income-driven plan calculates payments at 20% of your discretionary income. But it’s the only one currently available to parent PLUS loan borrowers.
The ED calculates discretionary income (on all except the income-contingent plan) as the difference between your adjusted gross income (on your tax return) and 150% of the poverty guideline for your family size and state of residence.
Additionally, if you’re unemployed or your income is close enough to the poverty line, your payment could be as low as $0 per month but still count toward any forgiveness programs.
Although they can significantly reduce your monthly payment, income-driven plans aren’t without their drawbacks. For more info on each plan, see our guide to income-driven repayment.
Consolidation
Consolidation is the process of taking out one single loan that replaces all your old loans. As a result, you’ll have only one loan with a single monthly payment to one student loan servicer.
Although not a repayment plan in itself, you may be able to extend your repayment term up to 30 years, which can lower your monthly payments. You may also need to consolidate loans to make them eligible for certain programs.
For example, if you have Perkins or FFEL loans (federal family education loans), you need to consolidate them to qualify for income-driven repayment programs. That’s because these discontinued loans aren’t direct loans, and only direct loans like consolidation loans qualify.
2. Determine How Much You Can Afford to Pay
Once you’re aware of your options, the question then becomes: How do you choose? That starts with taking a closer look at your budget.
Use a spreadsheet like Excel or Google Sheets or download a budgeting app like YNAB (You Need A Budget) or Personal Capital to start tracking your expenses and monthly cash flow. Record everything you spend. If possible, track your spending over a few months to get an average for the most accurate picture.
Based on your income and expenses, determine how much you can afford to put toward your student loans every month. If there’s not much left in your budget for making student loan payments, you probably need to lower your monthly payment.
But if you have plenty or even a surplus, there are other financial goals to consider.
3. Identify Your Repayment Goal
Once you have a clear picture of your monthly cash flow, you’ll know whether stretching your paycheck to make it through the month or another financial goal is the higher priority. Your repayment goal dictates which plan is best for you.
Best Plan to Lower Your Monthly Payment Amount: Income-Driven Repayment
If you’re struggling to afford your monthly payment and need to lower it, the best option is to enroll in an income-driven repayment plan.
These plans base your monthly payment on your discretionary income and consider your family size. Some plans even consider your spouse’s student loan debt.
But those plans may also consider your spouse’s income when determining your payments, depending on whether you file jointly or separately. So you may want to consult with a tax professional on whether it would be more beneficial to file jointly or separately.
Also be aware that while income-driven repayment plans can be a saving grace if you’re living paycheck to paycheck, they make your loans more expensive in the long run because more interest accumulates over a longer repayment term.
Additionally, you’ll be in repayment far longer, especially if you borrowed loans to pay for grad school, since income-driven repayment plans tack on an extra five years of repayment for grad school loans.
So if you opt for income-driven repayment, don’t necessarily go with the plan that gives you the lowest monthly payment. Instead, if you can afford it, look for the one that will have you out of debt the soonest and for the lowest total cost.
Use the loan simulator at StudentAid.gov to discover what your monthly payments will be under each plan, how much in total you’ll have to repay, and whether you could end up with a remaining balance to be forgiven.
If income-driven repayment doesn’t lower your monthly bill, your only other options are the extended repayment plan or to consolidate your loans with a longer loan term, neither of which is ideal.
Best Plan to Lower Your Total Repayment Cost: Standard Repayment Plan
The longer you take to repay your loan, the more interest accrues. For example, if you borrow $27,000 at 3% interest and repay it over 10 years, you’ll pay about $4,300 in interest. But if you take 20 years, you’ll pay almost $9,000 in interest — more than double.
So while an income-driven repayment plan may seem attractive at first glance for its lower monthly payments and promise of forgiveness, they’re not suitable for all borrowers.
In fact, if you only borrowed $27,000 but earn more than $30,000, you won’t have a balance left to forgive after making 20 years of payments. But your loan will end up costing you far more on an income-driven plan than if you stuck to the 10-year schedule.
The picture gets even bleaker as debt levels rise. Most borrowers with high amounts of debt end up paying more in interest on an income-driven plan than they originally borrowed. That means you could end up repaying two or more times your original loan amount in the end.
So if you don’t need an income-driven plan, it’s best to stick to the standard 10-year repayment schedule. That will keep your loan as inexpensive as possible. And if you can afford to pay your loan off even faster than 10 years, you’ll save even more in interest, lowering the overall cost of your loan.
As an alternative, if you work in an industry where you expect your income to rise steadily over the next 10 years, opt for the graduated plan.
It lets you make smaller payments when you’re just starting out. Payments increase every two years to keep you on a 10-year repayment schedule but are never more than three times what they were previously.
This plan makes sense for new graduates who don’t earn a lot out of the gate but expect their incomes to significantly increase in the future, such as lawyers and physicians.
But the plan can be tricky if things don’t happen as expected. It’s always possible you may not have the higher income to make those bigger payments in the future. So if you go this route, recognize it’s a gamble.
Best Plan to Pay Your Loans Off Faster: Standard Repayment Plan
It can take decades to pay off your student loans. But you can prevent that by sticking to the standard 10-year repayment schedule.
Best of all, you’ll pay less interest since less accrues over a shorter period. And that means the total cost of your loan will be less. And if you want to pay off your student loans even faster, put extra money toward them any time you have cash to spare.
To make that even easier, use a micro-savings app that rounds up your purchases and deposits the change into a linked savings account. Better yet, there are several apps that help pay off your student loans by sending your micro-savings directly toward your student loan bills.
Best for Balancing Savings With Debt Payoff: Graduated Repayment Plan
If paying your bills is eating into every dime of your spare change, you likely have nothing left to put toward your savings goals, including building an emergency fund, saving for a down payment on a home, or investing in your nest egg.
But if you wait until you’re done paying off your student loans before you start putting money away for your golden years, you’ll lose out on thousands of dollars in compound interest.
Thus, it’s best to find a balance between investing and paying off debt. The graduated plan can potentially help you do that by giving you a lower monthly payment when your income is lower just out of college. Then, payments gradually rise every two years, theoretically along with your income. So you won’t be overstretched.
At the same time, you stick to a 10-year schedule, so you don’t drag out repayment for decades and have your loans end up costing you more than you save.
For example, if you borrowed $27,000 and repaid on the standard repayment plan, your monthly payment would be $258. But if you opted for the graduated plan instead, your initial payment would be $142.
If you invested the difference between the amount you’d pay on the standard repayment plan and the graduated plan every month for the first six years, and the market returned the historical average of 7.08%, you’d have just over $6,100.
Of course, by this point, your graduated plan payments are much higher than they would have been on the standard plan. So now, you have to let that sit in the market and put money toward paying off your student loans for the remaining four years.
But that’s OK because while you focused on paying the higher graduated plan payments, your retirement account grew to over $8,000.
Even more dramatic, you’re way ahead of investors who waited to start until after they’d paid off their student loans. For example, let’s say at the end of the repayment term, you start investing the $258 standard plan payment each month. That’s quite a bit less than what you paid at the end of your graduated plan, so you’d still have extra disposable income.
After another 20 years, you’d end up with close to $160,000. It would be even more if you invested the final graduated plan payment amount each month.
But borrowers who started with a $0 balance after paying off their loans will only end up with just over $128,000 after 20 years of investing. That’s over a $30,000 difference that started as just an $8,000 difference.
Best for Simplifying Your Monthly Payments: Consolidation
If you’re making multiple monthly payments on multiple student loans with varying due dates to multiple servicers every month, student loan consolidation can simplify repayment, ensuring you don’t miss payments.
However, be aware that consolidation won’t decrease the interest rate on your student loans. That’s a common student loan consolidation myth.
In fact, consolidation could end up costing you more in interest. It gives you the option to extend repayment up to 30 years. And if you do, you’ll end up significantly increasing the total amount of interest you’ll repay since more interest accumulates over a longer term.
If you need to lower your monthly payment, income-driven repayment plans are the better option since they come with benefits beyond merely extending the repayment term — including interest subsidies and student loan forgiveness.
But consolidation isn’t right for everyone, so read our article on student loan consolidation before taking this route.
Best Plan to Qualify for Loan Forgiveness: Income-Driven Repayment
You can have the balance of your loans canceled after making a certain number of required payments, but you must enroll in an income-driven repayment plan to qualify.
All income-driven plans forgive any remaining balance after 20 to 25 years of qualifying payments. But some borrowers may also qualify to have their loans forgiven in as few as 10 years if they’re eligible for public service loan forgiveness.
Best Plan to Lower Your Interest Rate: None
Unfortunately, there’s no federal repayment plan that will lower the interest rates on your student loans.
Although federal student loan interest rates change annually, the rate for the year you borrowed is the rate you’re stuck with until you pay it off. That’s because all federal student loans come with fixed interest rates set by federal law.
To significantly lower your interest rate, you need to look at refinancing your student loans with a private refinance company.
However, once you refinance, there’s no turning back. You’ll no longer have a federal student loan, and your loan will belong to a private bank.
That means you’ll no longer have access to any federal repayment programs, including federal deferment and forbearance options, income-driven repayment, and public service loan forgiveness.
You may think you won’t need access to these options, but the future is uncertain. So only refinance your federal student loans if you have a well-paying job in a stable industry, you have a plan to pay them off quickly, and you have excellent credit that scores you a significant interest rate discount.
4. Run the Numbers
Once you’ve figured out your budget and goals, do the math to see exactly what each plan looks like for you.
Start with the loan simulator at StudentAid.gov. If you log in to your student account (or sign up if you don’t already have one), it can pull up your actual loans to give you the most accurate scenario possible. The simulator asks you a series of questions based on your current life situation and goals.
Additionally, you can play around with other student loan calculators. These can give you even more information about how various scenarios affect you.
For example, if you know you want to pay off your loans as quickly as possible, a prepayment calculator shows you can pay them off one year faster by adding just $25 per month to your payment.
Calculators can also show you what happens if you lower your monthly payment. For example, an income-based repayment calculator can give you an overview of what your monthly payments will look like now and at the end of your repayment term on the income-based repayment plan (a type of income-driven plan).
You can even see how much interest you’ll accrue, how much you could have forgiven, and what the potential overall cost of your loan could be.
But these numbers are contingent on an annual salary growth of a certain percentage (which many calculators allow you to change). So if your salary grows by significantly more, you could also end up paying substantially more on some income-based plans.
So always keep in mind when using student loan calculators, even the one at StudentAid.gov, that a change in your circumstances can change the outcome.
Final Word
If you can’t afford your federal student loan payments at all, deferment and forbearance are options. But most borrowers are better off on a repayment plan.
The good news is you can always switch to a different repayment plan down the road. The only points of no return are consolidation and refinancing, which you can’t undo.
That means you can change your mind — and your payment plan — if your goals change or unforeseen circumstances put a crimp in your financial plans.
