There are several different federal student loan repayment plans you can choose from, each one designed to meet different needs and requirements. The repayment plan you choose will impact your cost of borrowing as well as the time it takes to clear the debt. Understanding the different types of federal student loan repayment plans, how each one works and how each one impacts you will help you choose the right plan for you.
First, we’ll cover the two main routes for repaying student loans while you’re still in college. We’ll then dive into the different repayment plans available for federal student loans after you graduate from college.
Options for Repaying Federal Student Loans
You have two main federal student loan repayment options:
1. Defer Principal and Interest While at School
Most student loans come with the option of deferring payments until you’ve left school or graduated. This allows students to focus on their studies without worrying about paying back their loans.
Direct Subsidized Loans require special mention in this regard. On this type of loan, the Department of Education covers the interest on it while a student is still enrolled (at least at half time status) and 6 months after leaving school.
With all other types of student loans, interest starts accruing from the day the funds are disbursed. While you can defer repayment on these loans until after the grace period, the interest keeps accruing throughout this time. By the time your repayment period starts, your total loan amount will be calculated as the principle + accrued interest.
2. Pay Down Your Loans While Still at School
You have the option to start making payments on your federal student loans while still in school. In most cases you will have three options. Each of these scenarios has different consequences on the total cost of the loan and your repayment timeline.
- Pay the principal and interest: Paying both, the principal amount and interest, is an option if you have the funds. Paying the principal reduces the total loan amount and consequently the amount of interest that accrues. Not all lenders offer this option though.
- Pay interest only: Paying interest only while at school means you only pay the interest that’s accruing, but do not make any payments towards the principal amount. This could be an option if you have limited funds. While it does not reduce the principal, it does help cap the interest that accrues.
- Pay partial interest: If you’d like to get ahead of your loans, but don’t have the money to pay off all the interest that’s accruing, there are options for paying partial interest, too. Every little bit will help if the interest is adding up while you’re at school.
The payments on all unpaid student loans will come due six months from your graduation date. At this time, your federal repayment options will be different.
It’s important to contact your federal loan servicer to understand your options, as each institution may offer different repayment solutions.
Here’s a look at the student loan repayment plans after the grace period.
Federal Student Loan Repayment Plans After the Grace Period
1. Direct Consolidation
Direct Consolidation is a great option if you have multiple federal student loans with varying amounts, interest rates, and due dates. Combining multiple loans results in a single monthly payment and single due date, simplifying repayments. The interest on this single loan is calculated as the weighted interest of all the loans in the consolidation.
- You can choose a 10, 15, 20, or 30-year repayment term on the new consolidated loan.
- Choosing a longer repayment term lowers your monthly payments but increases the accrued interest and hence the cost of the loan over the longer period.
- A shorter repayment term increases your monthly payments but lowers the interest accrued over the period of the loan.
Take time to understand the pros and cons of consolidating federal student loans before you choose this option.
2. Fixed Payment Repayment Plans
The federal government offers three fixed payment repayment plans. All three plans base your monthly payment around three criteria – the amount you owe, the interest rate on the loan, and a fixed repayment period. While they all work around the same basic principle of fixed monthly payments, the plan you choose can impact how much you pay every month. Note that not all types of federal loans are eligible for all plans.
Here’s a breakdown of the three types of fixed payment repayment plans:
Standard Repayment Plan
You will be automatically enrolled in this plan when you take a federal student loan unless you choose a different plan. You must inform your loan servicer about your preferred plan.
Monthly payment amount: Under this plan, the total loan repayment amount is divided into 120 equal monthly payments so that the loan is paid off in 10 years. For Consolidated Loans the repayment term can range from 10 to 30 years.
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- All PLUS loans – Direct or Federal Family Education Loan(FFEL)
- All Consolidation Loans (Direct or FFEL)
Extended Repayment Plan
Extended repayment plans increase the loan term to 25 years. This lowers your monthly payments, which can help if you can’t afford the standard repayments. You can choose from fixed payments or payments that increase over time. The advantage of this plan is that it makes the monthly payments more affordable. The downside is it increases the cost of the loan.
Monthly payment amount: Payments may be fixed or graduated and calculated such that the loan is completely paid off within 25 years.
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- All PLUS loans (Direct or FFEL)
- All Consolidation Loans (Direct or FFEL)
Note: If you have Direct Loans, you must have more than $30,000 outstanding to qualify for this plan. If you’re an FFEL borrower, you must have more than $30,000 in FFEL Program loans.
Graduated Repayment Plan
Graduated repayments plans combine elements of standard plans and income-driven plans. With this repayment plan, the monthly payments start low but increase steadily over the 10-year loan term. For Consolidated Loans the repayment term can range from 10 to 30 year. This option can help when you cannot afford the standard payments.
Monthly payment amount: Payments start low and increase every two years. The payment amounts are calculated such that the entire loan amount is paid off within 10 years.
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- All PLUS loans (Direct or FFEL)
- All Consolidation Loans (Direct or FFEL)
3. Income-Driven Repayment Plans
Income-driven repayment (IDR) plans calculate your monthly payments as a percentage of your income. In this case, your income determines your monthly payments. Borrowers who enroll in any income-driven repayment plan could get the remaining balance forgiven after making a certain number of consecutive monthly payments.
There are four types of income-driven repayment plans you can choose from- Saving on a Valuable Education (SAVE), Pay As You Earn (PAYE), Income-Based Repayment (IBR) and Income-Contingent Repayment (ICR). Each IDR plan calculates monthly payments differently.
If you enroll in any of the IDR plans, you will have to submit updated information regarding your income and family size every year. This is because these two factors impact your monthly payments. Your loan servicer will recalculate your monthly payments for the year based on the new details submitted. This recertification process is mandatory for all borrowers who enroll in an IDR plan, regardless of whether or not there is any change in income or family size.
Here’s a breakdown of the types of income-driven repayment plans:
SAVE Plan
The SAVE or Saving on a Valuable Education Plan is one of the newest repayment plans. It was formerly the REPAYE Plan that has been redesigned.
Monthly payment amount: Monthly payments are calculated up to 10% of discretionary income.
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans excluding Direct or FFEL PLUS loans made to parents
PAYE Plan
The Pay as You Earn (PAYE) is similar to the SAVE Plan in that it calculates the monthly payment as 10% of your discretionary income. The difference is under the PAYE Plan, your monthly payments will never be higher than what you would pay under the standard 10-year repayment plans.
This could be a good loan repayment option if you have a high debt to income ratio as will lower your monthly payments considerably. However, only borrowers who meet certain borrowing criteria are eligible to enroll in this plan.
Monthly payment amount: Monthly payments are 10% of discretionary income but always lower than what your payments would be under the 10-year standard repayment plan.
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans excluding PLUS loans (Direct or FFEL) made to parents
Note: Only borrowers who took these loan types on or before October1, 2007 and received disbursement on or after October 1, 2011 are eligible for enrolling in this plan.
IBR Plan
The Income-Based Repayment (IBR) Plan could be a good repayment option if you have a high debt to income ratio and don’t qualify for the PAYE plan. Under the IBR plan, your payments may be either 10% or 15% of your discretionary income, depending on when you received your first income. In either case, your monthly payments will never be higher than what you would pay under the 10-year Standard Repayment Plan.
Monthly payment amount: Depending on when you received your first loan, you may pay either 10% or 15% of your discretionary income but always lower than what your payments would be under the 10-year standard repayment plan.
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Subsidized and Unsubsidized Federal Stafford Loans
- Direct and FFEL PLUS Loans made to students
- Direct or FFEL Consolidation Loans excluding PLUS loans (Direct or FFEL) made to parents
ICR Plan
The Income-Contingent Repayment (ICR) plan is limited to three loan types. When calculating monthly repayment amounts, it considers two scenarios and uses the lesser of the two as the monthly repayment.
Monthly payment amount: Monthly payments are calculated as 20% of discretionary income or your projected repayment with a 12-year fixed plan, adjusted to your income, whichever is lesser.
Eligible loans:
- Direct Subsidized and Unsubsidized Loans
- Direct PLUS Loans made to students
- Direct Consolidation Loans (including those that repaid parent PLUS loans)
For applicants hoping to receive an income-driven repayment plan, remember that you need to reapply every year, but you can change your plan whenever you wish.
As with any part of the federal loan process, it is important to do your research and take a close look at your family dynamics, salary, job expectations, and more. You can always contact your lender for more information on the options available to you.
The repayment plan options on private student loans are very different from federal student loan plans. Make sure to understand your private student loan repayment options so you can choose the right option for you.
Use College Raptor’s student loan calculator to estimate your monthly student loan payments and overall loan costs. And if you’re still looking for student loans, College Raptor’s new Student Loan Finder makes it easy to compare lenders and interest rates to find the ideal student loan for you!
