When it comes time to pay back your student loans, you will discover a variety of federal repayment plans. To complicate matters, you won’t find an option that stands out as the best. Some work great in certain circumstances, while others excel under different conditions.
Selecting the best repayment plan requires more than just finding the one with the lowest monthly payment. Each one has unique features that can be positive or negative. The trick is to understand the differences between them.
Today, we will take a deep dive into federal student loan repayment plans. We will cover the repayment schedule, rules, and regulations for each repayment plan. Then, we will explore who could benefit from that particular payment plan.
We will first review a few basic concepts helpful in understanding federal student loan repayment.
Federal Student Loan Servicers
The company paid by the government to collect your federal loans is your student loan servicer. The servicer is supposed to guide borrowers through repayment options, including plan selection. However, they don’t always offer the best advice.
Loan servicers can be a valuable source of information, and working with them is essential for making payments. However, it can be a big mistake to rely entirely upon federal student loan servicers. There have been multiple lawsuits brought against loan servicers for failing borrowers.
If you are unsure which lender services your federal student loans, the Department of Education tracks up-to-date records on the servicer(s) assigned to your loans.
Repayment is the Goal
Much of this article will cover the minimum payment requirements on various plans. Selecting the repayment plan with the lowest minimum monthly payment can have significant advantages. But, it’s important to remember that most borrowers will have to pay back their loans in full with interest.
Making the smallest payment possible can result in maximum interest accrual. For this reason, borrowers shouldn’t just seek out the “best” federal repayment plan. Instead, they should come up with a strategy for debt elimination. The goal should be to eliminate student loans while spending as little as possible. Merely delaying payments will only increase the cost of the debt.
The Loan Simulator
One of the most valuable resources for federal borrowers is the Loan Simulator. This tool lets you use your actual loan information to estimate your payments on various repayment plans. It isn’t a perfect resource. It has to make certain assumptions about you, your loans, and your repayment. However, it does a decent job of helping people consider how the different repayment plans would work in their circumstances.
Federal Student Loan Consolidation
You may have one or more federal loans that are ineligible for a desired repayment plan or program. You can usually remedy this issue by consolidating your federal loans. Federal student loan consolidation is when the federal government combines all of a borrower’s existing federal loans into one or two individual loans. Determining whether or not you should consolidate can be a tricky question. But it’s an essential question to answer, especially if you’re considering pursuing Public Service Loan Forgiveness.
Finding the Best Federal Repayment Plan
If there isn’t a single repayment option that stands out as the best, how do you pick the right one?
The best way to think about federal repayment plans is to consider them as tools in a toolbox. For example, a borrower might opt for a very low minimum payment plan to focus her efforts on paying down high-interest credit card debt. Once she pays off the high-interest debt, she can switch tools and turn to a more aggressive repayment strategy. In other words, there isn’t a “best” repayment plan. Instead, borrowers should focus on finding the plan that best fits the needs of their circumstances.
The key is to understand how you can use these tools. Once you understand the various options, you can pick the right tool for the job.
The Standard Repayment Plan
The Standard Repayment Plan is often called the 10-year repayment plan. This plan is the default plan on which the government initially places most borrowers. Accordingly, the first student loan bill to show up in your mailbox is probably based on this plan. It is also the repayment plan that usually has the highest minimum payment.
The math on the standard repayment plan is simple. Payments are calculated so that the loan is paid off in full after ten years, or 120 payments. The monthly payments stay level for the duration of the loan. Note: For borrowers who consolidate their loans, the standard repayment plan can have a 10 to 30 years repayment length.
The Graduated Repayment Plan
The government set up the Graduated Repayment Plan to help borrowers ease into their student loan repayment. Borrowers enrolled in the graduated repayment plan will see their monthly payments increase every two years. The repayment length on the graduated repayment plan is ten years. However, if the borrower has previously consolidated their federal student loans, repayment can last for 10 to 30 years.
While making smaller payments that gradually increase may sound appealing, this plan isn’t the best choice for most borrowers. One of the significant flaws with the graduated repayment plan is that it doesn’t qualify for some of the best federal student loan forgiveness programs. Borrowers looking for lower payments are typically better off opting for an income-driven repayment plan due to their increased flexibility.
The Extended Repayment Plan
The Extended Repayment Plan gives borrowers 25 years to repay their student loans. There are two options with this plan. The first offers fixed payments for the entire 25 years. The second, sometimes called the Extended Graduated Repayment Plan, offers graduated payments. Borrowers who opt for lower payments now and higher payments in the future will end up spending more on interest.
Like the Graduated Repayment Plan, the Extended Repayment Plan doesn’t qualify for some student loan forgiveness programs. Accordingly, this plan is less than ideal for most borrowers. Even for borrowers who don’t expect to pursue loan forgiveness, opting for an income-driven plan is often preferable. This is because it keeps that possibility open in the future.
If the Extended and Graduated Repayment Plans seem like undesirable options, there is a reason. The government created these plans long before it created the newer, more borrower-friendly plans. In some ways, these plans are ineffectual relics. However, it’s certainly conceivable that circumstances could exist in which a borrower might want to choose one of these plans.
Public Service Loan Forgiveness Note: While the Graduated and Extended Repayment plans are not eligible for PSLF, borrowers who are otherwise eligible may have a limited opportunity for forgiveness.
Income-Driven Repayment Plans
The remaining federal repayment plans fall into the category of Income-Driven Repayment (IDR) plans.
What makes these plans special is that monthly payments are based upon how much a borrower makes rather than what they owe. In theory, this means that all federal borrowers should be able to afford their monthly payments.
Under all of the IDR plans, borrowers must first submit income verification. This usually means a recent tax return or latest paystub. From this information, the loan servicer will calculate a borrower’s discretionary income. We have previously looked at discretionary income calculations in detail. The short version is that once a borrower earns enough income to be above 150% of the federal poverty level, they must pay a portion of that surplus income towards their student loans. The percent of discretionary income required depends upon the specific IDR plan selected.
A big perk of IDR plans is that they are eligible for student loan forgiveness after 20 to 25 years, depending on the plan. For borrowers with no hope of ever repaying their federal loans, this route to forgiveness offers a light at the end of the tunnel. The bad news is that the IRS considers forgiven debt to be income for tax purposes. Unlike Public Service Loan Forgiveness, there is no special exception for this type of student loan forgiveness. As a result, borrowers planning on forgiveness after 20 to 25 years need to prepare for a giant tax bill in that year. If you have $50,000 in student loans forgiven, the IRS will tax you as though you earned an extra $50,000 that year.
The table below shows the basics of each Income-Driven Repayment Plan.
|Plan||Discretionary Income Required||Years Until Forgiveness|
|ICR - Income-Contingent Repayment||20%||25|
|IBR - Income-Based Repayment||15%||25|
|PAYE - Pay As You Earn||10%||20|
|IBR for New Borrowers*||10%||20|
|REPAYE - Revised Pay As You Earn||10%||20 or 25**|
* New Borrowers are defined as those who started borrowing after July 1, 2014.
** Borrowers with graduate school debt qualify after 25 years, while those with undergrad debt qualify after 20 years.
While our table does cover the basics of the various IDR plans, there is fine print associated with each program that borrowers should understand. In some cases, this fine print prevents certain borrowers from applying to their desired repayment plan. In other cases, some repayment plans have unique perks that make them an ideal option.
Pay As You Earn (PAYE)
The Pay As You Earn (PAYE) plan is one of the most popular federal student loan repayment plans. The government expects borrowers to pay only 10% of their discretionary income. Furthermore, the government grants forgiveness after 20 years. The 10% and 20-year numbers are both the lowest available of all the IDR plans. The PAYE plan is also an eligible repayment plan for Public Service Loan Forgiveness.
The downside to PAYE is that it is available only to borrowers who are new as of Oct. 1, 2007, who received a disbursement of a Direct Loan on or after Oct. 1, 2011.
With the many advantages to PAYE, eligible applicants are likely to find PAYE to be the best income-driven repayment plan. The one notable exception is borrowers who have large balances and small incomes.
Revised Pay As You Earn (REPAYE)
The government initially created the Revised Pay As You Earn (REPAYE) plan to help borrowers with loans too old to qualify for PAYE. Like PAYE, REPAYE requires only 10% of a borrower’s discretionary income. REPAYE is also a repayment option for borrowers hoping to qualify for Public Service Loan Forgiveness (PSLF). And, like PAYE, borrowers with only undergraduate debt can have their balances forgiven after 20 years. Unlike PAYE, borrowers with graduate debt cannot qualify for forgiveness until they have made 25 years of payments.
When the government drafted REPAYE’s final rules, it created a unique rule for borrowers.
REPAYE is unique in the way it treats excess interest. Excess interest is best described as the interest your loan generates each month that your payment doesn’t cover. For example, if your loan charges $200 in interest each month, but your minimum monthly payment is only $100, your balance is growing by $100 per month. REPAYE helps borrowers in this situation because half of the excess interest goes uncharged. In our example, the loan balance would grow by only $50 per month, rather than $100.
When loan balances grow with each passing month, the loan is negatively amortized. REPAYE is the only repayment option with a favorable perk for borrowers with negatively amortized loans.
Important Note for Borrowers with Negatively Amortized Loans: If the interest due on your loan is greater than the payment due, your balance is going to increase each month. However, this extra interest isn’t immediately added to your principal balance. Instead, the extra interest waits for an event to trigger interest capitalization. When the interest is capitalized, you start paying interest on the extra interest, which can cause a balance to grow fast. Borrowers in this situation need to understand the events that can trigger income capitalization and avoid them when possible.
A downside to REPAYE is that it includes spousal income regardless of whether or not the couple files separately.
Due to the way REPAYE handles excess interest, it should be the preferred option for most borrowers who have massive debts but low monthly payments. REPAYE is also a good option for borrowers with loans too old to qualify for PAYE or IBR for new borrowers.
Income-Based Repayment Plan (IBR)
The Income-Based Repayment (IBR) plan is one of the most popular repayment plans. For a long period, the IBR plan was by far the best option for many borrowers. As time has passed, however, the government has created new programs such as PAYE and REPAYE. This means that, while IBR might still be the preferred choice for some, it is no longer the slam dunk it used to be.
Before we get into the IBR specifics, it is essential to note that there are two forms of IBR: IBR for New Borrowers and the standard IBR plan. These two repayment plans work in the same manner, but there are three key differences. IBR for New Borrowers:
- only charges 10% of discretionary income (standard IBR is 15%),
- offers forgiveness after 20 years (standard IBR is 25), and
- is only available to borrowers who started borrowing after July 1, 2014.
The IBR for New Borrowers plan is an excellent option, but few borrowers are currently eligible for this repayment plan.
IBR used to be the best option for borrowers who weren’t eligible for PAYE because it is only open to new borrowers as of Oct. 1, 2007, who received a Direct Loan disbursement on or after Oct. 1, 2011. However, the creation of REPAYE has mostly fixed that issue because it does not have a “new borrower” limitation.
Today, the borrowers who might still want to opt for IBR would be those who desperately want to file their taxes separately from their spouses. IBR plans don’t include spousal income in the monthly payment calculations. Thus, IBR borrowers should be willing to pay 15% of their discretionary income and probably a higher tax bill.
Income-Contingent Repayment Plan (ICR)
The Income-Contingent Repayment (ICR) plan is much less desirable than the newer IDR plans. This is because ICR charges 20% of discretionary income and requires a full 25 years before student loan forgiveness is an option. ICR is an eligible repayment plan for Public Service Loan Forgiveness purposes.
However, ICR is still a good option for some borrowers because it is some borrowers’ only option. The most common example would be parents who borrowed PLUS loans. If these parents consolidate their PLUS loans into a federal direct consolidation loan, they can become eligible for ICR and Public Service Loan Forgiveness. For many Parent PLUS loan borrowers, this is the best option.
FFEL Loans, PLUS Loans, and Perkins Loans
The Federal Family Education Loan (FFEL) program and the Perkins loan program were two very popular forms of student loans for several years. In 2010, Congress terminated the FFEL program and chose not to renew the Perkins Loan program in 2017. These two programs were unique in their funding structure. As a result, the government treats repayment of these loans somewhat differently than the standard federal direct loans. Although the PLUS loan program continues to this day, it also receives specialized treatment in repayment.
Borrowers with FFEL, PLUS, and Perkins loans should know that these loans may not be eligible for all repayment plans. They should also know that federal direct consolidation can often serve as a backdoor to make the debt eligible for the desired repayment plan. However, some of these loans can be toxic and destroy program eligibility. For example, including a PLUS loan made to a graduate student into a federal direct consolidation can make that loan eligible for REPAYE. However, including a PLUS loan made to a parent into a federal direct consolidation makes the entire consolidated loan ineligible for REPAYE.
We won’t be getting into the specific eligibility issue for these loan types, but borrowers with these loans should be aware of the potential problems. Handling these loans will require a bit more research and extra conversation with your student loan servicer.
Does My Spouse’s Income Count in Repayment Plan Calculations?
Being married can make federal student loan repayment a bit more complicated.
As a general rule, the Department of Education looks at a couple’s ability to pay the debt and calculates discretionary income for the couple rather than the individual. For married couples who both have federal student loans, this means that the math will get a little more tricky, but household spending on federal student loans will remain constant. When calculating payments, the Department of Education first ascertains the exact number it expects a couple to pay each month. The Department then determines the monthly amount owed based upon relative loan size.
For couples who both have federal student loans, the math might look like this:
Mr. and Mrs. Example both sign up for IBR. Based upon their latest tax return, the Department of Education determines that 15% of their combined income results in a $300 per month IBR payment. Mr. Example owes $40,000 on his student loans, while Mrs. Example owes $20,000. Because Mr. Example’s debt is double his wife’s, he will owe double the payment. Mr. Example will be charged $200 per month while Mrs. Example gets charged $100 per month. If Mr. and Mrs. Example had equal debt, they would each be expected to pay $150 per month. Filing taxes separately wouldn’t save the couple any money; it just means the individual payments may be slightly different depending upon loan balances.
For couples with one spouse who has federal loans and one who does not, things get more tricky. This is because most IDR plans will calculate payments based upon their combined income rather than just the borrower’s income. The good news is that the couple can file their taxes separately to secure a lower payment on some repayment plans. The bad news is that by filing separately, the tax bill in April can be more expensive. For some couples, it makes more sense to file jointly and live with the higher monthly payment because the debt will have to be paid in full. For others, filing separately to get lower payments might make sense if the student loan borrower is chasing after student loan forgiveness.
Unfortunately, not all repayment plans allow for filing separately to get lower payments. Specifically, REPAYE does not allow couples to use this tax move to get lower payments. The other IDR plans will allow for separate filing to secure lower monthly payments.
How do I change Repayment Plans?
Enrolling in your desired plan can be as easy a phone call to your student loan servicer, though enrollment in an income-driven repayment plan will require a little more work.
The key to a successful enrollment is constant contact with your loan servicer to ensure that things are done per your instructions.
Signing up for an Income-Driven Repayment plan will require completing an Income-Driven Plan Request with the Department of Education. The form takes just a few minutes to fill out, and most borrowers can have the IRS send their most recent tax return information directly to the Department of Education, making the process fast and straightforward. Other borrowers may have to manually submit recent pay stubs if they are not using a tax return.
IDR requests can take well over a month to be processed, so borrowers should not expect instant results on their application.
Is Deferment or a Forbearance an Option?
Borrowers who are struggling to repay their federal loans can opt to sign up for a deferment or forbearance. This usually isn’t the best strategy, however. When a borrower isn’t making payments towards their loans, the balance grows, and a difficult situation becomes even harder to manage.
In short, forbearance or deferment is a short-term solution to a long-term problem. These options may be helpful in some limited circumstances. But, most borrowers are better off by putting a plan in place to eliminate their debt rather than just delaying payments.
Opting for an income-driven repayment plan can mean $0 per month payments. What’s more, it starts the borrower on a path to forgiveness and debt freedom.
Refinancing with a Private Lender
Another option for federal student loan repayment is to refinance with a private lender.
This option carries major risks because the refinance process pays off old federal loans in full and creates new private loans. These new private loans don’t have the same great forgiveness programs or the flexibility afforded by income-driven repayment plans. Making things even riskier is the fact that there is no way to “undo” a student loan refinance. Once the federal loan is paid off, it can never come back.
The benefit is that borrowers can get dramatically reduced interest rates. Several lenders offer refinancing services, and they target borrowers with good jobs and a strong credit rating.
Weighing the risk vs. the reward on the refinancing decision can be tricky. We usually suggest borrowers hold off on refinancing until they are confident that they won’t ever need income-driven repayment or student loan forgiveness. At that point, it is time to check the current refinance rates to see if there are any potential savings available.
Which Federal Repayment Plan is the Best Option?
There are a variety of federal repayment plans, and there are specific circumstances where each repayment plan excels.
Many borrowers may find that one plan is best initially but change plans as their repayment situation evolves.
The most important thing for borrowers is to understand the options available so that they don’t miss out on any savings opportunities.