- There are a dozen different student loan repayment plans available for federal loans, but most people are in the standard repayment or income-driven repayment plans.
- Borrowers often choose either the repayment plan with the lowest monthly loan payment or the repayment plan with the highest monthly loan payment.
- Federal student loans offer more repayment options than private loans.
- Besides repayment plans, you can choose automatic payments, refinancing and more to help with the costs of paying back student loans.
For many graduates, paying back student loans is a long-term prospect. Add to that possibly unpredictable income when you’re just starting out or other financial changes down the line, and making monthly payments can be downright challenging. Fortunately, you do have some helpful options, including repayment plans for federal student loans, opting for automatic payments and refinancing your loans.
Repaying federal student loans can be especially confusing because there are a dozen different repayment plans. Learn how to identify the repayment plan that works best for you, and other strategies that can make paying back your student loans a little easier.
Inside this article
Federal loan repayment plans
In addition to standard repayment, there are two extended repayment plans, two graduated repayment plans, four income-driven repayment plans and three alternative repayment plans.
Here are the important differences between the most popular repayment plans:
Standard repayment is a plan with equal monthly payments throughout a 10-year repayment term. Each payment is about 1% of the original loan balance from when the loan entered repayment. The minimum monthly loan payment is $50.
Graduated repayment starts off with low monthly payments and then increases the payments every two years. The initial payments are barely above interest-only payments.
There are two versions of graduated repayment, one involving a 10-year repayment term and the other involving the same repayment terms as extended repayment. The minimum monthly loan payment is $25. And the plans are subject to certain rules:
This repayment plan is subject to the three-times rule, which requires that no payment is more than three times any other payment.
No payment can be less than 50% or more than 50% of the loan payment under standard repayment.
Every payment must be at least the new interest that accrues.
Extended repayment is similar to standard repayment, but involves a longer repayment term. There are two versions of extended repayment. One provides a 25-year repayment term if the borrower owes $30,000 or more. The other requires consolidation and provides repayment terms of 10, 12, 15, 20, 25 or 30 years, depending on the amount owed.
For example, you can:
Obtain a 20-year repayment term with $20,000 to $39,999 in federal student loan debt
Obtain a 25-year repayment term with $40,000 to $59,999 in federal student loan debt
Obtain a 30-year repayment term with $60,000 or more in federal student loan debt
A 30-year repayment term yields a monthly student loan payment that is about half of the loan payment under a standard 10-year repayment term. The loan payments are always at least the new interest that has accrued since the previous payment. The minimum monthly loan payment is $50.
Income-Contingent Repayment (ICR)
ICR is one of four income-driven repayment plans that base the loan payment on your income, family size and state of residence. The monthly payment under ICR is equal to 20% of discretionary income, which is defined as the amount by which adjusted gross income (AGI) exceeds 100% of the poverty line.
The remaining debt is forgiven after 300 payments (25 years). You have to have loans in the Direct Loan program to be eligible for this plan. If you’re married and file federal income tax returns as married filing separately, the loan payment under ICR is based on just your income; if you file a joint return, the loan payment is based on the combined income. The minimum monthly loan payment is zero, which will happen if income is less than the poverty line.
Income-Based Repayment (IBR)
The monthly payment under IBR is based on 15% of discretionary income, which is defined as the amount by which AGI exceeds 150% of the poverty line. The monthly payments are capped at the monthly payment under standard 10-year repayment.
The federal government pays any unpaid interest on subsidized loans but not unsubsidized loans during the first three years. The remaining debt is forgiven after 300 payments (25 years). Your loans have to be in either the Federal Family Education Loan (FFEL) or Direct Loan programs in order for you to be eligible for IBR. The tax filing rules if you’re married are the same as for the ICR repayment plan. The minimum monthly loan payment is zero, which will happen if income is less than 150% of the poverty line.
Pay-As-You-Earn Repayment (PAYE)
The monthly payment under PAYE is based on 10% of discretionary income, which is defined as the amount by which AGI exceeds 150% of the poverty line. The monthly payments are capped at the monthly payment under standard 10-year repayment.
The federal government pays any unpaid interest on subsidized loans but not unsubsidized during the first three years. The remaining debt is forgiven after 240 payments (20 years). To be eligible, you have to be in the Direct Loan program and have had loans disbursed on or after Oct. 1, 2011, and no loans prior to Oct. 1, 2007. Tax filing rules are the same as for the ICR and IBR repayment plans. The minimum monthly loan payment is zero, which will happen if income is less than 150% of the poverty line.
Revised Pay-As-You-Earn Repayment (REPAYE)
The monthly payment under REPAYE is based on 10% of discretionary income, which is defined as the amount by which AGI exceeds 150% of the poverty line. The monthly payments are not capped and will increase indefinitely as the borrower’s income increases.
The federal government pays any unpaid interest on subsidized loans and half of unpaid interest on unsubsidized loans during the first three years. After the first three years, the federal government pays half of any unpaid interest on subsidized and unsubsidized loans. The remaining debt is forgiven after 240 payments (20 years) if the borrower has only undergraduate loans, 300 payments (25 years) if the borrower has any federal loans for graduate or professional school. You have to be in the Direct Loan program to qualify.
If you’re married, the loan payment under REPAYE is based on the combined income whether you file federal income tax returns as married filing separately or married filing jointly. The minimum monthly loan payment is zero, which will happen if income is less than 150% of the poverty line.
If you have loans in the FFEL program, you are also eligible for Income-Sensitive Repayment (ISR), which bases the monthly loan payment on a percentage of gross monthly income, from 4% to 25%, for a limited period of time. It is not really a repayment plan and is rarely used.
There are also several options for short-term financial relief, such as the unemployment deferment, economic hardship deferment and general forbearances. The obligation to make payments on federal student loans is suspended during deferments and forbearances.
The federal government pays the interest on subsidized loans but not unsubsidized loans during deferments. During forbearances, the federal government does not pay the interest on any loans. Any unpaid interest is capitalized at the end of the deferment or forbearance period by adding it to the principal balance of the loan. From that point onward, interest will be charged on the capitalized interest.
Coming changes to federal repayment options
On Aug. 24, President Joe Biden presented a plan that seeks to change how income-driven repayment options will work going forward. According to analysis from the New York Times, the Biden plan will impact PAYE, REPAYE, ICR and IBR plans. It will make some important changes, including the following:
It will lower the monthly payment from 10% of discretionary income to 5% for undergraduate loans. (Graduate loans payments will still be based on 10% of discretionary income.)
Instead of 20 years, borrowers with original loan balances of less than $12,000 will have a 10-year repayment period.
It will increase the amount of income designated as non-discretionary, so that borrowers who make less than 225% of the poverty level won't have to make payments. Since the 2022 federal poverty guideline is $13,590 for a one-person household, under the new rules someone making $30,577 a year or less would have a monthly payment of $0.
Under any of the federal income-driven repayment plans, interest won't accrue while the borrower makes their monthly payments. This will help borrowers see their balance shrink rather than balloon because of compounding interest.
While these changes are still underway, they should lower payments and total balances for the majority of federal borrowers.
Private student loan repayment options
Private student loans offer fewer repayment plan options than federal student loans. Most private student loans offer a level repayment plan with a repayment term of 5 to 20 years. Some offer a number of years of interest-only payments followed by regularly amortized payments.
After the borrower enters repayment, most lenders will not allow a change in repayment term on a fixed-rate loan, as their costs are higher on a longer repayment term. The main option will be to refinance the loan into a loan with a longer repayment term (and higher interest rate). The lender may show more flexibility in changing the repayment term on a variable rate loan, since the spread between the interest rate borrowers pay and the cost of funds will be fixed.
There may be more flexibility for temporary accommodations, such as forbearances or partial forbearances. Private student loans offer forbearances in two- to three-month increments up to a maximum of one year in total duration. Some private student loans offer partial forbearances that provide interest-only payments.
How to choose a federal repayment plan
There are two main strategies for choosing a repayment plan: paying off the debt as quickly as possible and paying off the debt as slowly as possible.
If you don’t choose a repayment plan, you’ll be placed in the standard repayment plan.
You should switch repayment plans if you can’t afford your loan payments and there are no prospects for increasing income or decreasing expenses to free up cash flow for the loan payments.
Choosing the Lowest Loan Payment
Here are a few situations where choosing a repayment plan with the lowest monthly payment might make sense.
You’re seeking Public Service Loan Forgiveness (PSLF). Since forgiveness is based on the number of payments you make, and not the amount, it makes sense to keep your monthly payments as low as possible.
If you’re looking to buy a house, you may want to reduce your loan payments since the debt-to-income ratio used in mortgage underwriting is based on the actual student loan payment. Previously it was based on an assumption of a minimum loan payment equal to 1% of the loan balance.
If you reach retirement age and still have student loans, you may want to minimize the impact of the student loan payments on your cash flow. Since federal student loans are canceled upon death of the borrower, some borrowers may even seek to have the student loans outlive them by choosing as long a repayment term as possible.
The repayment plans that typically have the lowest monthly payments are the extended repayment or an income-driven repayment plan. Which is better depends on the amount of debt and your income.
Meanwhile, income-based repayment plans will reduce the monthly payment below the standard repayment amount when total student loan debt exceeds annual income. Among the income-driven repayment plans, PAYE will yield the lowest monthly loan payment and ICR will yield the highest monthly loan payment.
If you are ineligible for PAYE, the lowest monthly loan payment will be provided by IBR or REPAYE, depending on your specific circumstances. In some situations, IBR will yield a lower loan payment if you’re married or if your income is increasing. But, you’ll need to estimate your loan payments over the repayment term to see which repayment plan will yield a lower total cost.
Choosing the Highest Loan Payment
If you’re capable of repaying your student loans, you should choose the repayment plan with the highest monthly payment you can afford. This is usually the repayment plan with the shortest repayment term, such as standard repayment.
A higher loan payment will pay off the debt as quickly as possible, by applying more of each payment toward the principal balance of the loan. This will also save the most interest over the life of the loan.
Other options for saving money on student loans
There are several other ways you can save money on student loans, whether you have federal or private student loans.
Sign up for AutoPay, where the monthly student loan payment is automatically transferred from your bank account to the lender. Federal student loans provide a 0.25% percentage point reduction in the interest rate as an incentive. Private student loans sometimes offer a 0.25% or 0.50% interest rate reduction.
Claim the Student Loan Interest Deduction on your federal income tax return. This lets you deduct up to $2,500 in interest paid on federal and private student loans, saving a few hundred dollars on your taxes. You can claim it even if you don’t itemize deductions.
Accelerate repayment of the loan with the highest interest rate. Making extra payments using this method, known as the avalanche method, pays off all the loans sooner and reduces the total interest paid over the life of the loans.
Refinance the loans if you can qualify for a lower interest rate. A private refinance will often require a shorter repayment term, such as five or seven years, for the lowest fixed interest rate. Applying for the refinance with a creditworthy cosigner who has a better credit score can also yield a lower interest rate, even if you could qualify for the refinance on your own.
Be careful about refinancing federal loans into a private student loan, as you’ll lose the better benefits of federal loans, such as longer deferments and forbearances, income-driven repayment and loan forgiveness options