Navigating Federal Student Loan Repayment Options

With the ever-increasing cost of higher education, student loans are more or less a necessary evil. Even though they’re the status-quo, many people are left high and dry when it comes to figuring out which option is best for them. Things get even more confusing when choosing a repayment plan. It sometimes feels as though you need a whole new degree just to work through the onslaught of choices available to you. To ease the process for you, you can find a comprehensive list of student loan repayment options, for both private and federal loans, below. 

Standard Repayment

As a graduate approaches their first repayment date, they will be presented a number of different repayment plans. If they don’t choose anything, their loan servicer, the institution or company that manages the billing and client services of the loan, will place them on the standard repayment plan

On the standard plan, monthly payments come in a fixed amount and take up to 10 years to pay back, except if you have Direct Consolidation Loans or FFEL Consolidation Loans. With consolidation loans, the length of repayment is determined by the total loan indebtedness, which includes the consolidation loan amount and other student loan debt. Consolidation may take anywhere between 10 to 30 years to repay. 

For many people, standard repayment plans present the best option. If you can afford the fixed monthly payments, these plans will cost you less in the long run, especially if you pay above the monthly rate and chip away at the interest. 

Graduated Repayment

Available as an option for most types of federal loans, graduated repayment plans offer monthly payments that start low and increase in price every two years for up to 10 years. Like standard plans, those with Direct Consolidation Loans or FFEL Loans will have a longer term. In this plan, payments will never be less than the amount of interest that accumulates between payments. If worried that payments will jump exponentially in price, rest assured that a payment will never be more than three times higher than any other payment. 

Graduated repayment plans sound pretty appealing, but it’s important to read between the lines. First, consider the progression of the payment’s price. Culturally, we believe that our salary and job description will improve as the years go by, but this idea is being increasingly challenged and is unattainable for many recent college graduates. There is no guarantee that after two years they will be making more money, so defaulting or being unable to afford payments down the road is a reality to consider. 

Second, it’s important to understand what the literature on graduated plans mean when they state “payments will never be less than the amount of interest that accumulates between payments.” This line is less of an assurance of affordability than it is a statement suggesting that for awhile all you’ll be paying is the loan’s interest, not the actual loan. 

Third, since you start off repaying the loan at such a low amount, you’ll probably end up paying more over time as interest accumulates. 

If you’re in an industry with reliable upwards mobility, a graduated plan may be a great option for you. However, keep in mind that life, and income, doesn’t always go the way we expect it to. 

Extended Repayment

Unlike the previous plans, extended repayment plans are more stringent about eligibility. While most loan types apply, there are stipulations surrounding loan circumstances. For example, Direct Loan borrowers cannot have an outstanding balance as of October 7, 1998, or on the date the Direct Loan was obtained after October 7, 1998, and your balance must be more than $30,000 in outstanding Direct Loans. The same restrictions apply to those with FFEL Program loans. 

For all other loan types, extended plans allow for low monthly payments that are either fixed or graduated and last up to 25 years. Payments for these plans are usually much lower than standard repayment plans and graduated repayment plans. 

Extended repayment plans, especially those with fixed payments, are much more straightforward than graduated plans. However, remember that extending the period of repayment will increase the overall amount you pay since interest will continue to accrue year after year.

Income-Driven Repayment Plans

In short, income-driven repayment plans are exactly what they sound like. Monthly payments are determined by calculating a percentage of the borrower’s discretionary income and the repayment term is extended by 10 to 15 years. After the designated repayment period, any remaining debt is forgiven. There are quite a few different types of income-driven repayment plans based on loan types, fields of industry, and education level: 

  • Revised Pay as You Earn Repayment Plans (REPAYE): Monthly payments are determined by calculating 10% a borrower’s annual discretionary income. Loan forgiveness is enacted after 20-25 years;
  • Pay as You Earn Repayment Plan (PAYE): Conditions of PAYE are the same as the Revised Plan. However, PAYE approvals are only eligible to borrowers who were new borrowers on or after October 1, 2007, and collected a disbursement of a Direct Loan after October 1, 2011; 
  • Income-Based Repayment Plan (IBR): Loan repayment is determined on a rate of 10% or 15% of discretionary income. Loan forgiveness occurs after 20 to 25 years, respectively. The rate is determined by the date in which the borrower became a new borrower;
  • Income-Contingent Repayment Plan (ICR): Payment is based on 20% of the borrower’s discretionary income and loan forgiveness is applied after 25 years. 

Like any of the previous plans that lower monthly payment and increase repayment term, income-driven plans will cost more money over time as interest accrues. Additionally, these plans require a lot of paperwork to get started, and income information must be updated every single year. If you miss the deadline, you could be smacked with the standard payment amount and be unable to afford repayment. On the other hand, if you begin earning more money, you may be able to pay more than the minimum payment and chip away at the interest. 

It’s also important to note that even after the loans are forgiven there will be some fees. The IRS considers cancelled debt as a source of income, so you may get smacked by a large tax bill when taxes are due. The more money that was forgiven, the more taxes you’ll have to pay.  

It’s easy to read through this and think that there isn’t particularly one great option for repaying student loans. On the one hand, you can have high monthly payments for 10 years, and on the other hand, low monthly payments for 20 to 30 years. However, when looking at student loans, or any kind of debt, it’s essential to consider how much you’re paying in the long run versus how much you actually borrowed. 

Though many people find it difficult to stick to a standard repayment plan, it presents the best option as it stays the closest to your original loan amount. In any case, talking to a financial advisor, or taking a careful look at your finances, can help you determine which option is best for you. 

Chris Jacob is a Registered Representative with Saxony Securities, Inc.. Securities offered through Saxony Securities Inc. (SSI). Member FINRA, SIPC. Non-security products and services or tax services are not offered through SSI. Cadeau is not affiliated with SSI.

Originally posted on

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