45 million Americans have student loans. And based on the number of questions I get about student loan repayment plans, I’d estimate approximately 40 million Americans are struggling to understand their options for repayment.

With federal student loan payments resuming in October of 2023, many borrowers are weighing their options. When it comes to repaying federal student loans, there are many options for repayment, which provides a lot of flexibility for borrowers to keep payments manageable and in alignment with their budgets and financial goals.

The myriad of options can feel more like a maze than a life preserver. But fear not. I’ve got you.

In this post, I’ll break down the key differences between these plans, so you can find the one that suits your needs best.

New Repayment Plan for Student Loans

As if understanding your options wasn’t already confusing to the max, Uncle Sam has gifted us with yet another option for paying off our student loans. You might have heard of this new plan called SAVE — it’s been getting a lot of media attention since the Biden administration announced the creation of it in the summer of 2023.

This new repayment plan for student loans doesn’t fully go into effect until July of 2024, but it’s not a bad idea to inform yourself about this new option and all of the others.

Understanding Student Loan Repayment Plans

Let’s take a look at the different repayment plans and some of the pros and cons of each.

1. Standard Repayment Plan

The Standard Repayment Plan is often the default option for federal student loans. It offers fixed monthly payments over a 10-year term. This plan may be ideal if you can comfortably manage higher monthly payments and want to pay off your loans as quickly as possible.

• Who qualifies: everyone

• Pros: faster loan payoff, lower overall interest paid

• Cons: higher monthly payments

2. Graduated Repayment Plan

The Graduated Repayment Plan is designed for borrowers whose income is expected to increase over time. Payments start low and increase every two year until your loans are paid in full in 10 years. This plan is suitable if you anticipate a salary increase but need lower initial payments.

• Who qualifies: everyone 

• Pros: lower initial payments, payment increases align with income growth

• Cons: higher overall interest paid, not suitable for those planning on taking advantage of of loan forgiveness programs

3. Extended Repayment Plan

The Extended Repayment Plan extends your loan term up to 25 years, reducing monthly payments. You can choose between fixed or graduated payments. This plan is beneficial if you need lower monthly obligations but want to maintain eligibility for federal loan benefits.

• Who qualifies: all borrowers, but those with Direct loans and FFEL loans must owe more than $30,000 to be eligible for this plan

• Pros: lower monthly payments, extended loan term

• Cons: higher overall interest paid

Income-Driven Repayment Plans (IDR)

Income-Driven Repayment Plans are specialized repayment plans tailored to your income and family size. 

There are four main IDR plans:

1. Income-Based Repayment (IBR)

Income-Based Repayment (IBR) caps your monthly payments at 10-15% of your discretionary income depending on when and how much you borrowed. Regardless of when and how much, you’ll never pay more than you would on the standard repayment plan on IBR.

For borrowers before July 1, 2014, payments are limited to 15% of discretionary income, but they won't exceed what you'd pay on the Standard Repayment Plan.

• Who qualifies: Direct and FFEL borrowers

• Pros: monthly payments based on income, loan forgiveness after 20-25 years

• Cons: longer loan term, potential tax liability upon forgiveness

2. Pay As You Earn (PAYE)

PAYE limits payments to 10% of your discretionary income and forgives the remaining balance after 20 years. To qualify, you must be a new borrower on or after October 1, 2007.

• Who qualifies: borrowers who borrowed on or after October 1, 2011. 

• Pros: lower monthly payments, loan forgiveness after 20 years, qualifies for public service loan forgiveness (PSLF) program

  Cons: no cap on the monthly payment equal to the payment on a standard repayment plan; it will always be 10% of your disposable income. So if your income rises to the point where you can pay more than that amount, you will be required to do so. Spouse's income is included even if you file separately.

3. Saving on a Valuable Education (SAVE)  (Formerly REPAYE)

SAVE benefits both undergraduate and graduate borrowers capping payments at 10-15% of discretionary income.

The SAVE program also includes an interest subsidy that would prevent loans from ballooning over time because of unpaid interest.

For borrowers who were previously on the REPAYE plan, they will be automatically enrolled in SAVE (you can contact your loan servicer to change repayment plans if SAVE does not align with your financial goals). 

• Who qualifies: direct loan borrowers with qualifying loans

• Pros: monthly interest subsidy, low monthly payments, $0 payments for borrowers making less than $15 an hour, borrowers could reach loan forgiveness quicker than on other plans 

• Cons: borrowers who are married filing jointly may not benefit, potential for higher overall interest due to longer repayment terms

4. Income-Contingent Repayment (ICR)

ICR calculates payments as the lesser of 20% of discretionary income or the amount you'd pay on a fixed 12-year plan. It offers loan forgiveness after 25 years.

• Pros: flexible terms, loan forgiveness after 25 years

• Cons: potential for higher monthly payments

Choosing the Right Repayment Plan

There’s no easy answer for choosing the “right” repayment plan. 

Honestly? It’s sort of like choosing between Ryan Reynolds and Ryan Gosling. At the end of the day, you’re still getting a hot Ryan, you just need to decide what individual qualities you value most (ya know, like abs, sense of humor, net worth…remember to always set your non-negotiables 😉).

Selecting the right repayment plan depends on your unique financial situation and career goals (read: just ‘cause your college bestie is on one plan doesn’t mean it’s for you).

Here are some important factors to consider:

1. Current Income

Your current income level plays a significant role in determining the affordability of various repayment plans. Plans like IDR are particularly advantageous if your income is low or if you experience frequent fluctuations in your income.

2. Future Income Expectations

Consider your expected career trajectory and income growth. Plans like the Graduated Repayment Plan may be suitable if you anticipate salary increases over time.

3. Loan Forgiveness Goals

If you aim to qualify for a loan forgiveness program like PSLF teacher loan forgiveness, veteran loan discharge, etc, income-driven plans like IBR, PAYE, REPAYE, or ICR may be your best bet. However, be prepared for potential tax implications upon forgiveness.

4. Monthly Budget

Assess your monthly budget to ensure you can comfortably make payments without straining your finances. Make sure to leave some money for you to still live your life today! If your current plan is taking up every single extra dollar you have, that’s going to be miserable. You don’t deserve that! Plans like the Extended Repayment Plan may provide lower monthly obligations.

5. Eligibility

Some plans, such as PSLF, come with strict eligibility criteria. Ensure you meet all requirements before committing to a specific plan. AND make sure you take into account if capitalized interest will go into effect if you do change plans. This can add quite a bit onto loans depending on your sitch.

If you have not already gone to the Federal Student Aid website and used their amazing Loan Simulator, run, don’t walk. This simulator uses your actual loan information, income information, house size, and walks you through different scenarios so you can have a comprehensive side-by-side comparison of your options.

It’s freakin’ legit. 

Should I Make More Than My Minimum Monthly Student Loan Payment?

I think our knee jerk reaction when we’re swimming in debt, especially capitalizing student loan debt, is to throw any extra money we have at the balance. And while it sounds like a good idea…there may be a better option for that extra cash.

The general rule of thumb is if a debt is 7% or under, it makes more sense to invest vs aggressively paying down the debt.

Why? Because the stock market averages a return of 8% over time, after inflation. Not each individual year, but an average over time.

If you can earn more interest on your money by investing it than your debts are costing you, then it makes sense to invest.

For example, if you have student loans with an interest rate of 5% and a stock market index fund that returns on average 8% a year after inflation, you’ll come out ahead by investing your extra cash in the index fund.

When we consider the average student loan or 30-year mortgage interest rates, chances are that a lot of the debt you’re paying off each month will have rates lower than the 7% rule of thumb.

The thing to keep in mind here though is that you need to be actually investing that extra money.

Wrapping Up 

Take the time to assess your current financial situation, future career prospects, and loan forgiveness goals. It’s frustrating in the short term, but really worth it in the long run because you could save thousands of dollars throughout the life of your loan. 

If you’re still confused about your options or have specific questions about a repayment plan option, do not hesitate to contact your loan servicing company! Historically they have not been great about answering questions, if you’re rolling your eyes at this suggestion, I totally get it.  But thanks to some of the changes at the Department of Education, loan servicers are now more educated and responsive than ever.