How to Choose a Student Loan Repayment Plan

If you have federal student loans, here are some of your best options—and the benefits of each.
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When you take out student loans, they often don’t feel real. You know it’s tangible money, but the distance between you and what you owe is enough to push that debt into the back of your mind. Then you graduate, and things get very real, very quickly.

Once you start making payments, it becomes clear how important it is to choose an effective repayment plan. Depending on your particular situation, that can mean thousands of dollars over the life of your loan. If you have federal loans, here are some of your best options—and the benefits of each.

Standard

The standard plan requires borrowers to pay the same amount every month for 120 payments. It’s the default repayment plan for those with federal student loans, and a great option for anyone looking to pay off their loans in less than 10 years.

One of the best reasons to choose the standard plan is that you’ll pay the least amount of interest compared with any other federal repayment plan (unless you’re part of a separate program that includes loan forgiveness). If you’re going to choose this plan, make sure you’re confident that you can make payments every month for 10 years and aren’t going to have any major changes to your financial circumstances that would hinder your ability to pay.

Public Service Loan Forgiveness (PSLF)

Public Service Loan Forgiveness (PSLF) is a program offered through the federal government for those who work in a government, nonprofit, or related job for 10 years. After making 120 payments, the remaining loan balance is forgiven.

The borrower also doesn’t have to pay income tax on the amount forgiven (a key difference between this forgiveness program and others).

To qualify, you must verify that your employer is eligible under these guidelines. If you’re unsure whether or not your company qualifies, contact your loan provider as soon as possible.

Because you must work continuously for an eligible employer, this strategy should only be used by graduates who can commit to doing this kind of work for 10 years. You don’t get partial credit if you drop out early, so think carefully before taking the plunge.

REPAYE

REPAYE is the latest repayment program available from the federal government. Under REPAYE, borrowers’ payments equal no more than 10% of their discretionary income (defined as your adjusted gross income minus the federal poverty line).

You make payments for 20 years (25 years if you include graduate school loans), after which any remaining balance is forgiven.

You can go here to estimate what your monthly payment would be under this plan. Many low-income borrowers would see their payments drastically decrease under REPAYE.

REPAYE is available to anyone with federal student loans, no matter which kind they have or when they initially took out the loan. Only Parent PLUS loans are exempt.

Choosing an income-based strategy can be helpful for someone going through PSLF, since you’ll likely pay less over time. However, if you can afford to make regular payments, REPAYE may not be your best option. People in this situation will pay significantly more in interest because of the increased payment length.

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