7 Federal Student Loan Payback Plans: What You Need to Know

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In October, the Department of Education began contacting borrowers who were struggling to pay back their student loans to let them know about the various repayment options that are available to them.

“We think there are lots of people who could benefit from our income-based repayment programs, but they haven’t signed up—and we want to get to them before they default,” education secretary Arne Duncan said recently. “The challenge is getting the word out.”

Although most borrowers choose to repay their loans on the standard 10-year plan, other options, like those based on income, can make repaying student loans easier on the wallet—and lower your risk of default. Last year, about 600,000 borrowers defaulted on their loans, an action that has the potential to tank their credit reports and get them in major financial hot water.

So here’s the word: Whether or not you already have a repayment plan, keep reading to find out if another offering might be better for you. Just note that these programs are only available for federal loans—not private—and eligibility for each one depends largely on the types of loans you have, so consult our “learn more” link for each of the seven plans highlighted below for more information.

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Standard Repayment Plan
How It WorksYou’ll be automatically enrolled in this plan if you don’t choose another one, and it requires that you make fixed monthly payments of at least $50 for up to 10 years.
The ProsYou’ll pay off your loan faster compared to other plans, and pay less interest as a result.
The ConsYour monthly payments will be higher than those made through other plans.
It’s Best for …Anyone who can afford the high monthly payments. It’s, by far, the most popular option: Two-thirds of all direct-loan borrowers—nearly 10 million people—are on the standard 10-year payment plan as of June 2013.
 Learn more about the Standard Repayment Plan at studentaid.gov.
Graduated Repayment Plan
How It WorksYour payments start low, and increase every two years.
The ProsYour loan is still paid off within 10 years.
The ConsYou’ll pay more interest over the lifetime of your loan compared to the Standard Repayment Plan.
It’s Best for …Borrowers who may not be able to handle the higher monthly payments under the Standard Repayment Plan, but who are confident that their income will increase steadily. More than 1.2 million borrowers are currently enrolled in this plan.
 Learn more about the Graduated Repayment Plan at studentaid.gov
Extended Repayment Plan
How It WorksThe repayment window for this plan is up to 25 years. You have the option of setting fixed monthly payments, like with the Standard Plan, or increasing them over time, as with the Graduated Plan. To be eligible, a borrower must have more than $30,000 in Direct Loans or Federal Family Education Loans borrowed after October 7, 1998.
The ProsSmaller monthly payments (since they’re spread out over as many as 25 years) and more time to pay off your loan.
The ConsYou’ll be saddled with payments for a longer period of time as well as pay more interest.
It’s Best for …Borrowers who need to lower their monthly payments—in exchange for paying more over the lifetime of the loan. Around 1.6 million borrowers currently take advantage of this option.
Learn more about the Extended Repayment Plan at studentaid.gov.  
Income-Based Repayment (IBR)
How It WorksMonthly payments are capped at 15% of your discretionary income, and readjusted each year based on your income and family size for up to 25 years. To be eligible, you must qualify for what’s called a “partial financial hardship,” so payments calculated under this plan would be less than under the Standard Plan. You can estimate your payments under the IBR plan here.
The ProsIf you make regular payments, you may be eligible to have any remaining debt forgiven after 25 years. If you work in public service, you could have some debts forgiven after 10 years. The government will also pay unpaid accrued interest on certain loans for up to three consecutive years if your payments don’t cover it.
The ConsYou have to provide annual documentation of your income to your loan servicer, so that your repayments can be adjusted. If you are late supplying that information, you will be automatically enrolled in the Standard Repayment Plan, which can mean a big jump in payments. You may also pay more interest over the course of this loan than you would with other plans, and you may also have to pay income taxes on the amount of debt that is forgiven after 25 years.
It’s Best for …Eligible borrowers with outsized loans who are looking to make their repayments more affordable. Currently, fewer than a million borrowers take advantage of this plan.
Learn more about the Income-Based Repayment plan at studentaid.gov
Pay As You Earn Repayment (PAYE)
How It WorksMonthly payments are capped at 10% of your discretionary income, and readjusted each year based on your income and family size. As with the IBR plan, you must qualify for a partial financial hardship to be eligible.
The ProsIf you make regular payments, you could have your remaining debt forgiven after 20 years. If you work in public service, you could have your debt forgiven after 10 years. Under certain conditions, the government will pay your unpaid accrued interest for up to three consecutive years from the date you started repaying your loans under PAYE. Interest is not capitalized (added to your principle, therefore increasing the amount owed) unless you no longer have a partial financial hardship, in which case the amount of interest that may be capitalized is limited to 10% of your original principle when you began using PAYE. In general, how often your interest is capitalized is determined by the terms of your loan—and the more often it’s capitalized, the more expensive it may be.
The ConsIf you graduated before 2011, you are likely out of luck. PAYE is only available to borrowers who have received a loan disbursement (meaning they or their school were given money from the lender) on or after October 1, 2011, and who were new borrowers as of October 1, 2007. You must also provide documentation of your income to your loan servicer each year (or be placed on the Standard Repayment Plan), and you may be on the hook for income taxes on the amount of debt that is forgiven.
It’s Best for …Recent graduates who want to keep their monthly payments low and affordable. It may be particularly advantageous for graduate students in high-cost programs, like law and business school.
Learn more about the PAYE Plan at studentaid.gov.
Income-Contingent Repayment Plan
How It WorksPayments, made for up to 25 years, are based on your adjusted gross income, family size and the amount of your loans. Your payments change as your income changes: You pay either an amount based on a 12-year repayment plan that’s multiplied by an income percentage factor or 20% of your monthly discretionary income—whichever is less.
The ProsYou can have your remaining loan balance forgiven after 25 years of regular payments.
The ConsYou’ll pay more over the lifetime of your loan than you would with a 10-year plan, and you may have to pay income taxes on any forgiven debt. If your monthly payment under the plan doesn’t cover accrued interest, the interest on your loan is capitalized once per year until the total balance is 10% higher than your original balance when you began paying off the loan. Any interest accrued during deferment or forbearance (both are types of payment hiatus) is not included in that rule.
It’s Best for …Borrowers who don’t qualify for IBR or PAYE plans because they don’t demonstrate a partial financial hardship, but who want to keep monthly payments low.
Learn more about the Income-Contingent Repayment Plan at studentaid.gov.
Income-Sensitive Repayment Plan
How It WorksYour monthly payments are based on your annual income. The income-sensitive repayment plan is an alternative to the income-contingent plan, for borrowers with loans that do not qualify for the latter.
The ProsYou determine the percentage of your monthly payment—between 4% and 25% of your monthly gross income—although your payment must be greater than or equal to the interest that accrues.
The ConsIt’s only available for up to five years. After that time, you must switch to another repayment plan, under which you may have up to 10 more years to repay your debt. You must also reapply annually, and there’s no guarantee that you’ll have continued enrollment in the plan.
It’s Best for …Low-income borrowers who want flexibility in setting their own repayment terms.
Learn more about the Income-Sensitive Repayment Plan at studentaid.gov.
  • kgal1298

    I looked this over the other way. My issue with IBR is they really really need to consider lost of living in certain areas. If I did IBR then I’d pay more than the standard rate, but the issue there is I live in LA the taxes alone destroy me because I work freelance on top of that I pay more than average on rent, which brings down the total amount of income you actually have to a lot less than the national average. Sure they could say you could move, but for some of us our jobs literally have to be in these areas especially if you work in tech and sure income can increase over time, but what do you do in the mean time? Just eat Banquet Meals all the time with a side of Ramen and live on the East Side and pay 800 in rent while having to commute 3 hours a day without a car to get to your job? Or have a car and pay about $150 a month in gas. Ugh it’s just depressing.