Choosing a student loan is complex at best. Every decision you make, from the loan amount to apply for to the repayment terms, will ultimately impact the amount of debt you have to repay after you graduate. Deciding on the right repayment period is one of the many factors that you need to take into consideration. Should you repay your loan within the standard loan repayment period of 10 years or will the extended loan repayment period of 25 years work out better for you? Each of the repayment options available has its own benefits as well as its own downsides.
To help make it easier for you to make the right decision, we’ve explained how the different repayment options work and the pros and cons of each.
10-Year Standard Repayment Plan
The Standard Repayment Plan is the default plan for most federal student loans. With this plan, your loan balance is spread over a period of 10 years, with a monthly payment of at least $50 per month.
Pros: Since it is the default plan, it is the easiest plan to enroll in. It will also cost you the least in interest payments because it is the shortest repayment period as compared to all other repayment plans. Within 10 years, you will be completely debt-free.
Cons: If your monthly income is lower than you expected, the monthly repayments can be a strain on your budget. Also, you will have to pay the agreed amount every month, regardless of your financial circumstances at any particular time period. You are not eligible for forgiveness with this plan.
The standard repayment plan is worth considering if you want to pay off your student loan debt quickly or if your annual salary is much higher than your student loan debt.
10-Year Graduated Repayment Plan
The Graduated Repayment Plan is also spread over a 10 year period but in this plan you start with lower monthly payments. Every two years, the monthly payments increase by a certain percentage. This is based on the assumption that most students earn relatively lower salaries at the start of their career but their incomes increase on average every two years.
Pros: You get some time to build your finances and ease into paying off your loans while still writing off your debt within 10 years.
Cons: By the time you clear your debt, you will end up paying more by way of interest as compared to the Standard Plan.
The Graduated Repayment Plan is a good option for you if you like the idea of being able to build your finances by paying less per month when you start out, even if it means paying more each month later.
25-Year Extended Repayment Plan
The Extended Repayment Plan gives borrowers a window of up to 25 years to repay their debt. Only those who have borrowed over $30,000 are eligible to apply for this plan. Under this plan, you can choose to make monthly payments as with the Standard Plan or graduated payments like the Graduated Plan. The only difference is that with the Extended Plan you make smaller monthly payments over a longer period of time.
Pros: The loan is spread over a longer period of time so you make smaller monthly payments and more time to pay off your loan. This can ease the financial stress considerably if you have a larger loan burden.
Cons: You will take a longer time to pay off your debt and you will also end up paying a significantly higher total interest.
You should consider this option very carefully. While it may seem beneficial to pay smaller monthly payments, it can cost you a LOT in the end. It may only be worth it if you have plans to use the money for some other purpose. Before you choose this option however, you must first explore the pros and cons of the Income-Based Repayment Plan.
25-Year Income-Based Repayment Plan
This can work out to be a hugely expensive repayment plan but it can come as a life-saver if you are struggling to afford the monthly payments under the other repayment plans.
This plan is based on your discretionary income, which is the amount remaining after deducting what is spent on paying taxes, social security charges and basic necessities such as rent, utilities and groceries. Under the Income-Based Repayment Plan, you can limit your monthly payment to 15 % of your discretionary income, provided that you can demonstrate financial hardship. Moreover, you may qualify to get the balance of the loan forgiven if you do not manage to pay it off within a period of 25 years.
Pros: By paying a percentage of what your discretionary income, you are sure that you will always have enough to pay for your basic necessities every month. You do not have to worry about where to get the money to pay your rent or buy your next meal.
Cons: By minimizing your monthly payments, you extend your repayment period considerably and will end up paying more by way of interest over the life of the loan.
Think of the Income-Based Repayment Plan as the last option. You should only choose it if you find that you absolutely cannot afford to make the monthly payments under the other repayment plans.
20-Year Pay As You Earn
Under the Pay As You Earn Repayment Plan, you may be able to limit your monthly loan payments to 10% of your discretionary income provided that you can demonstrate financial interest. You may also qualify to get the balance of the loan forgiven if you have not managed to pay it off within 20 years. It is similar to the Income-Based Repayment Plan in many ways but the terms are more generous. However, there is a complex calculation to determine whether or not you are eligible for this plan.
Pros: You only pay 10% of your monthly income so your payments will never exceed your earnings. You have the option of paying off your loans faster if you have the funds. You may be eligible for loan forgiveness after 20 years.
Cons: You can only choose this option if you have taken types of federal loans and if you took the loan on or after 10/1/2011. By making lower monthly payments and you extending the repayment period, you will end up paying more by way of interest over the life of the loan.
There is no one right repayment plan, no “one-size-fits-all” option. You must explore all of the options available and weigh the pros and cons of each in order to identify the plan that works best for your circumstances.
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