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Meet the Worst Federal Student Loan Repayment Plan

The worst federal student loan repayment plan has high monthly payments, no forgiveness options, and makes it harder to buy a home.

Written By: Michael P. Lux, Esq.

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There are a variety of federal student loan repayment plans, all with unique pros and cons, but the one that is undoubtedly the worst is the standard 10-year repayment plan.

Borrowers on the standard repayment plan sacrifice flexibility, have no route to forgiveness, face larger monthly payments, and limit their ability to qualify for a mortgage.

Worst of all, the standard repayment plan may be responsible for many unnecessary borrower defaults and delinquencies.

High Monthly Payments and a Lack of Flexibility

Of all the federal repayment plans, the standard 10-year plan is the one that usually has the highest monthly payments.

Higher monthly payments limit borrower flexibility. If you have car trouble or face unexpected medical bills, the higher monthly payments may cause a serious hardship.

Even if a temporary hardship isn’t a major concern, the lack of flexibility remains an issue. If a borrower has high-interest credit card debt or an investment opportunity, large federal student loan payments are an inefficient use of funds.

Additionally, for many borrowers, getting low minimum monthly payments is part of the path to fast debt elimination.

No Path to Student Loan Forgiveness

One of the significant perks of federal student loans is the variety of options for student loan forgiveness.

Unfortuantely, the standard repayment plan doesn’t help borrowers get closer to loan forgiveness. Borrowers on income-driven repayment plans start the clock towards loan forgiveness.

Many borrowers will never need or qualify for student loan forgiveness, but by staying enrolled in an income-driven repayment plan, the door is left open if circumstances change.

A note about Public Service Loan Forgiveness: The standard 10-year repayment plan is technically eligible for Public Service Loan Forgiveness. However, because PSLF takes 10 years, borrowers on the 10-year plan for the entirety of repayment will not have any debt left to forgive.

The 10-Year Plan is the Worst Federal Repayment Plan for Borrower Debt-to-Income Ratios (DTIs)

If you are in the market to buy a house, your debt-to-income ratio will determine whether or not you get a mortgage. It also impacts how big of a loan you can get.

Student loans are a major factor in debt-to-income ratio calculations.

Many borrowers mistakenly assume that DTI looks at total debt compared to yearly income. Instead, DTI compares monthly minimum payments on your debt to your monthly income. If your monthly student loan bill goes down, your DTI will improve. This is part of the reason that tweaking student loan strategy is essential before trying to buy a house. Borrowers can improve their standing in the eyes of creditors without paying anything extra to eliminate their debt.

In short, if you want to buy a house, the 10-year repayment plan is the worst federal option.

The Worst Part About the Worst Federal Repayment Plan: Scaring Borrowers

Thus far, we have looked at the standard repayment plan as it applies to most individuals.

Zooming out and looking at the big picture, there is another major issue with the 10-year plan. As the standard repayment plan, it is the basis for calculating a borrower’s first student loan bill.

This large bill and intimidating bill helps explain why over 10% of federal student loan borrowers default within their first year. Many borrowers may see the enormous bill and ignore it out of fear that there isn’t anything they can do. In reality, income-driven repayment helps borrowers afford payments. Those who can’t find jobs or earn less than 150% of the federal poverty level qualify for $0 per month payments.

If the federal government used a different plan as the “standard” repayment plan, borrowers could avoid student loan defaults and negative credit consequences.

The Only Advantage Isn’t an Advantage at All

The idea behind the 10-year repayment plan is that borrowers eliminate their federal loans in a decade. In theory, this sounds like a reasonable default method for student loan repayment. Of all federal repayment plans, the standard plan eliminates debt the quickest.

But is the “quickest debt elimination” really an advantage?

Borrowers are allowed to pay extra on their student loans whenever they want. There are no prepayment penalties or fees for eliminating federal student loans early. If a borrower had the money, they could pay off their student loans in a year.

In other words, if aggressive student loan repayment is your goal, the standard repayment plan isn’t any better than the other plans. Instead, borrowers that stick with the 10-year plan subject themselves to the previously described negatives without getting any additional benefit.

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About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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