Note: This article originally linked each short explanation to longer pieces on the site. I have included it in my portfolio as an example of my ability to write very short explanations of complex issues.
Federal student loans allow you to change your repayment plan at least once a year. Doing this can decrease your monthly payments; however, it can also increase the amount you repay overall.
What You’ll Learn
- Payment plans that can lower your monthly payment.
- Benefits and disadvantages of different plans.
- How to apply for these options.
If you have federal student loans that are not in default, you may be able to change their repayment plan. Some plans depend on your situation—like lowering payments based on your income and family size. However, the key is to look at the following options to figure out which best fits your financial needs.
Your First Option: Standard Repayment
When you start repayment, you automatically enter this plan, which has you make the same monthly payment for 10 years. This plan repays your loans faster than most other plans—and the faster you pay off a loan, the less interest builds up. So, with standard repayment, you may pay less overall than with other plans; however, to do this, your monthly payments may be higher.
Income-Driven Repayment Plans
If you’re having trouble covering a standard payment, you may qualify for an income-driven repayment plan. There are several types of income-driven plans, but you generally only qualify for one or two based on the loans you borrowed and when you borrowed them. Any of the following plans could lower your payments and keep you on track.
Revised Pay As You Earn (REPAYE)
Revised Pay As You Earn (REPAYE) is the latest income-driven repayment option for federal student loans, and most federal student loan borrowers can take advantage of it.
REPAYE reduces your monthly payments to no more than 10% of your discretionary income. After 20 years of eligible payments under REPAYE, your remaining balance would be forgiven (25 years if you have any loans from grad school), but that amount is taxable.
Income-Based Repayment (IBR)
Income-based repayment (IBR) can lower your payment based on your income and family size. While not everyone qualifies (you need to prove financial hardship), IBR generally decreases your monthly bill. There are two kinds of IBR. Depending on which you qualify for, you may be able to have your debt forgiven if you haven’t paid it all off after 20 years or 25 years. Just don’t forget that this amount is taxable.
Pay As You Earn (PAYE)
Pay As You Earn (PAYE) is very similar to New IBR. Both require you to prove a financial hardship, and both offer loan forgiveness after a set period of time (20 years for Pay As You Earn). However, the plans do have their differences. For starters, only specific new borrowers can qualify for PAYE.
Income-Contingent Repayment (ICR)
ICR works similarly to IBR and PAYE, except your monthly payments may be slightly higher. Under ICR:
- Only Direct loans or Consolidation loans (Consolidation loans may include Parent PLUS loans) qualify.
- Your monthly payment will be lowered.
- After 25 years, your remaining Direct loan balance is forgiven.
Income-Sensitive Repayment (ISR)
ISR is very different from the other income-driven repayment plans. You can only use ISR for a maximum of 5 years—then you have to switch to a different plan. For ISR:
- Only FFELP loans qualify.
- Your monthly payment will be lowered for up to 5 years (based on your choice between 4%—25% of your discretionary income).
- After your 5 years are up, you have up to 10 years to finish paying off your loan.
Other Repayment Options
If you want lower payments right now, but don’t want to make payments for the next 15-25 years, graduated repayment might be the option for you. With graduated repayment, you don’t need to provide your income information.
Graduated repayment is available for all federal student loans.
Your monthly payment will be lowered during the first couple years of repayment—but after that it’ll go up significantly.
You finish paying off your loan in 10 years (120 payments).
If you have a lot of federal student loan debt (more than $30,000), but you don’t qualify for low payments under an income-driven repayment plan, extended repayment may be your only option.
Extended repayment is available for FFELP, Direct, and Consolidation loans.
Your monthly payment will be reduced so you pay one low amount for a longer period of time. You can have up to 25 years to pay back your loan (300 payments) or 30 years and 360 payments for Consolidation loans over $60,000.