Student loan repayment season is nearing, and recent college graduates may be trying to understand the different types of repayment plans, and which ones may be best for them. Let’s explore what repayment plans exist for federal student loans, and how they differ.
Standard Repayment Plan
The most basic type of repayment plan is the Standard Repayment Plan. This is the default plan for most types of student loans. It breaks down your loan balance into monthly payments of at least $50 for up to ten years. In general, this is the plan that will cost you the least amount of money in interest payments.
Graduated Repayment Plan
Under the Graduated Repayment Plan, monthly interest payments start at a lower amount than under the Standard Repayment Plan and gradually increase – usually every two years – for up to ten years. This allows for flexibility at the beginning of the repayment period. However, you will pay more in interest than you would under the Standard Repayment Plan. This plan is best for borrowers whose income may start out low but is expected to increase.
Extended Repayment Plan
The Extended Repayment Plan allows borrowers to extend the repayment period from ten years to up to twenty-five years; however, they will end up paying more in interest than they would under the Standard Repayment Plan. Payments under the Extended Repayment Plan can be either standard or graduated. This plan is best for borrowers whose loan burden is too large to bear the standard monthly payments over the course of just ten years.
Income-Based Repayment Plan
The Income-Based Repayment (IBR) Plan allows borrowers with a demonstrated financial hardship to limit their monthly loan payments, excluding parental PLUS loans, to 15 percent of their discretionary income (that is, the difference between their adjusted gross income and 150 percent of the poverty guideline for their individual situation). Under this plan, if the balance of the loan has not yet been paid off after twenty-five years, it can be forgiven. However, in most cases, borrowers will pay more in interest over the life of the loan. This plan is best for borrowers whose financial situation is unstable or is insufficient to bear the monthly payments under other repayment plans.
Income-Contingent Repayment Plan
Under the Income-Contingent Repayment Plan, borrowers’ monthly payments take into consideration annual income and family size as well as the total amount of the loans, and if a loan balance remains after twenty-five years, it may be forgiven. Unlike the IBR Plan, borrowers need not be facing financial hardship to qualify for this plan. However, they will likely pay more in interest than in other repayment plans. This plan is best for borrowers who are not facing demonstrated financial hardship, but whose financial situation is insufficient to bear the monthly payments under other repayment plans.
Income-Sensitive Repayment Plan
Borrowers using the Income-Sensitive Repayment Plan pay a monthly loan amount that takes annual income into consideration. The length of the repayment period is up to ten years, and the balance is not forgiven at the end. Like other plans, borrowers will pay more in interest over other the standard repayment plan. This plan is best for borrowers whose financial situation may fluctuate over the course of the repayment period.
Remember that these are for federal loans only. If you have private loans as well, be sure to check with your lender.
For more information on student loans and Federal Financial Aid, visit studentaid.gov.
Kevin Suyo is a project manager at ED’s Office of Federal Student Aid