Tips to choose the best student loan repayment plan

While the Biden administration is working a Plan B to deliver student loan debt forgiveness, borrowers are contemplating their options for how they will pay down their loans. Student loan repayments to begin again in October, they had been on hold for over three years after the government paused them in March 2020.

There are a number of repayment plans that borrowers can choose from, including a new one rolled out by the Department of Education earlier this year. But there are some things that you should take into consideration before you go about changing your payment plan.

Tips to choose the best student loan repayment plan

While some used the student loan freeze to make strides in paying down their balance without the worry of interest accruing, which had also been on hold during the moratorium, others used the breathing space to for other means like paying down credit cards or toward other pressing financial needs. However, now borrowers must contend with monthly student loan payments having resumed. If you haven’t yet, it would be wise to sit down and figure out your financial situation and create a budget.

Make a budget

You can do this by looking at what your monthly expenses are, separating them by fixed (rent, utilities, etc.) and discretionary (entertainment, gym membership, vacations, etc.). Next, see how much you earn after taxes each month and then subtract your expenses to see how much you have left over, if anything.

From there, you can see how much you can dedicate to paying down your student loan, or where you can make some sacrifices to put more toward your student loan payments. You should also consider belt tightening, if needed, in order to put money away for a rainy-day fund.

Consider your goals and the long-term costs

Each payment plan has its pros and cons and while you may be able to get lower payments now, you could end up paying more over the long term through interest on the loan.

Those pursuing student loan forgiveness will want to look into an income-driven repayment plan, but your payments could increase over time as your income rises. However, while currently any amount discharged won’t be taxed by the federal government, that could change after 2025. Likewise, you could be on the hook for taxes in the state where you live.

Check out the different student loan repayment plans

Borrowers can choose from seven different repayment plans offered by the federal government. Switching between plans can be done at any time, free of charge. In order to do so you must contact your student loan servicer or by submit an application to Federal Student Aid.

Federal Student Aid has an online “Loan Simulator” that borrowers can use to compare estimated payments under the different repayment plans. Depending on what kind of repayment plan you have, you may not need to change.

Here’s a brief look at the seven plans:

Standard repayment plan

Borrowers are automatically enrolled in this plan when they begin repayments. Payments are fixed, typically over a ten-year period, up to 30 for consolidated loans.

Extended repayment plan

This plan may be right for those looking for lower monthly payments, but those will be over a longer period of time, up to 25 years. So, the you could end up paying more in interest. You must have at least $30,000 in student loan debt to qualify.

Graduated repayment plan

Payments under this plan start lower and then increase every two years. The typical length is ten years, 10 to 30 years for consolidated loans.

Saving on a Valuable Education (SAVE) plan

The Biden administration rolled out this plan in 2023, a revamp of the REPAYE plan, touting it as the “the most affordable student loan plan ever.” The SAVE plan will increase the amount of your discretionary income, as the difference between your annual income and 225% of the federal poverty level (previously 150%), protected from going toward repayment. As well it will drop the amount taken from discretionary income from 10% to 5%, effective starting July 2024.

Additionally, interest will not accumulate on loans where the borrower is making timely payments, including for those who qualify for zero-dollar monthly payments. Depending on the amount owed, the debt could be forgiven as soon as the borrower has made 10 years of payments.

Pay As You Earn (PAYE) Plan

This plan sets monthly payments at 10% of discretionary income, calculated as the difference between your annual income and 150% of the federal poverty level. The repayment period is 20 years, and any remaining balance at that time will be discharged. You must prove that you debt burden is high in comparison to your income to qualify.

Income-Based Repayment (IBR) plan

Like PAYE, the Income-Based Repayment plan sets your payments as a portion of your discretionary income, in this case depending on when you first took out your loans. Your monthly payments will be set at 10% to 15% of the difference between your annual income and 150% of the federal poverty level.

Repayment terms are between 20 and 25 years, any balance remaining at the end of that period will be forgiven. You must prove that you debt burden is high in comparison to your income to qualify.

Income-Contingent Repayment (ICR) plan

The Income-Contingent Repayment plan is available to all federal loan borrowers. As well it is the only plan that parents with PLUS loans can use.

Monthly payment under ICR are set as the lesser of:

20% of your discretionary income, calculated as the difference between your annual income and 100% of the federal poverty level. Or, what you would pay on a repayment plan with a fixed payment over a period of 12 years, adjusted according to your income.

Any balance remaining after 25 years will be discharged.