If you graduated college with federal student loans, you have 10 years to pay back your loans with the standard repayment plan. Depending on how much your current monthly payment & salary is, you may need a little more time. Thankfully, federal student loans are some of the most flexible types of loans when it comes to repayment options.
Although you do need to apply for a repayment plan&will potentially need to show supporting documentation to be approved for your new plan, it can be easier than you think. Below, are some of the different options you have in regards to repaying your federal student loans.
Income-Driven Repayment Plans
Income-driven repayment plans are the one competitive advantage that federal student loans possess over their private counterparts. With these plans, your monthly payment is capped at a small percentage of your monthly adjusted gross income and you pay no more than that amount each month. And, if you have a really low income, high student loan balance, or a combination of the two, any remaining balance after a designated amount of years (usually 20 years) is forgiven.
The U.S. Department of Education offers several different repayment plans that can help reduce your monthly payment.
Graduated Repayment Plan
This plan still allows you to repay your entire loan balance within 10 years, but, you can have up to 30 years with a federal consolidation loan. With graduated repayment, your monthly payments start low and gradually increase every two years. As your income grows with more work experience, your monthly payment grows accordingly.
Extended Repayment Plan
The extended repayment plan lengthens the repayment period from the 10-year standard up to 25 years. You must have at least $30,000 in federal loans to qualify for this plan. And, you also have the option of choosing a fixed monthly payment that remains the same for the duration of the loan or you can opt for a graduated monthly payment that will incrementally increase you approach the final payment.
Revised Pay As You Earn (REPAYE)
This might be the repayment plan for you if you are considering one that caps the monthly payment to 10% of your adjusted (discretionary) income. The monthly payment is recalculated each year to reflect any changes in your income and family size. If you are married and your spouse has federal loans, they can be included in the REPAYE plan too.
After 20 or 25 years of payment for undergraduate and graduate/professional loans, respectively, your remaining balance is forgiven. However, the balance can be forgiven after 10 years through the Public Service Loan Forgiveness option if you work for a select government or non-profit agency.
Pay As You Earn (PAYE)
PAYE is very similar to the REPAYE plan although one is sometimes cheaper than the other. You will pay no more than 10% of your monthly income and any remaining balance is forgiven after 20 years. Participating in the PAYE plan also allows you to qualify for the PSLF program.
Income-Based Repayment (IBR)
IBR plans restrict monthly payments to 10% of your discretionary income if you are a new borrower after July 1, 2014. Prior to this date will mean you could have to pay up to 15% of your discretionary income. This plan has a maximum repayment period of 20 or 25 years and the monthly payment is recalculated each year depending on your current income and family size.
Income-Contingent Repayment Plan (ICR)
With this plan, your monthly payment will be the lesser of the two options:
- 20% of your discretionary income
- Amount you would pay on a repayment plan with 12 years of fixed payments with adjustments to your income
The monthly payment is recalculated each year based on your income, family size, and total outstanding loan balance.
Any remaining balance is forgiven after 25 years unless you qualify for the PSLF option when your loans are forgiven after 10 years.
The final income-driven repayment plan will base your monthly payment on your annual income and allows you up to 15 years to repay the balance. Also, each federal lender might use a different formula to calculate the monthly payment, so your potential payment can vary.
What about Federal Consolidation Loans?
If none of the above options seem like a good fit, one final option is a federal consolidation loan. With this option, your loans are serviced by a federal lender meaning you still retain the various forgiveness and income-driven repayment options that you might decide to apply for in the future.
Through federal consolidation, you have up to 30 years to repay the balance. Unlike private student loan refinancing, your interest rate will not go down as federal lenders use a weighted average of all the loans you wish to consolidate. But, you will not receive a lower interest rate with any of the other repayment options, only an extended repayment term and potential forgiveness if you have a high debt-to-income ratio.
No matter which option you choose, it is easy to change your student loan repayment plan & lower your current monthly payment.