Student Loan Repayment Plans: Find The Best One For You

Loans, Student Loans

If you’re repaying federal student loans, your best bet is to keep it simple: Stick with the standard plan.

This is the plan all federal borrowers start with — on it, you’ll make equal monthly payments for 10 years. If you can afford the standard plan, you’ll pay less in interest and pay off your loans faster than you would on other repayment plans. You can go a step further and refinance your student loans to get a lower interest rate and, perhaps, pay off your loans even faster.

But all that is often easier said than done.

If you have federal loans and can’t afford your monthly payment on the standard plan, the government offers six alternative repayment plans to make your payments more manageable. These plans fall into two categories: income-driven and basic.

In this post:

How to choose the best student loan repayment plan for you

What to know about income-driven repayment plans

Understanding basic student loan repayment plans

How to choose the best student loan repayment plan for you

You don’t necessarily need to understand the nitty-gritty details of every federal student loan repayment plan to choose the best one for you.

You can plug your student loan information into the government’s repayment estimator to see exactly what you’d pay under each plan based on your income, outstanding loan balance and interest rate.

If you know you’re interested in an income-driven plan, you can apply and let your loan servicer put you on the income-driven plan with the lowest monthly payment you qualify for. Simply select “recommended” on the income-driven application instead of selecting a particular plan.

Still, understanding the basics of the various plans can help you make an informed decision. Here’s what you should know.

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What to know about income-driven repayment plans

Income-driven plans cap your monthly payment at a percentage of your income, and increase your loan term from the standard 10 years to 20 or 25 years. They also forgive any remaining loan balance at the end of that term, but you’ll have to pay taxes on the amount that’s forgiven. Although IDR plans typically give you a lower monthly payment than the standard plan does, you’ll end up paying more in interest.

One scenario in which switching to an income-driven plan is smart is if you’re eligible for Public Service Loan Forgiveness, a federal program available to government and nonprofit employees. If eligible, you have to make payments for 10 years before the government will forgive your remaining student loan balance. You’ll get more of your loan forgiven if you make payments on an income-driven plan for those 10 years.

There are four income-driven plans. The particular plan that’s best for you depends on when you first borrowed, your income and family size. Click on the names of each plan for more details.

Plan nameTerm length (Years)Monthly payment cap (% of income)
Nerd Note
Income-based repayment
20 or 2510% or 15%Need to have a certain income (based on your family size) to qualify.
Income-contingent repayment 2520%The only income-driven plan available for PLUS loan borrowers.
Pay As You Earn2010%Only a small group of borrowers qualify.
Revised Pay As You Earn20 or 2510%Open to all borrowers with federal direct loans.

You apply for IDR plans on the Department of Education’s website or through your loan servicer. You have to reapply for IDR plans each year with updated information about your income and family size; if something changes, your monthly payment could change too.

Your federal student loan servicer will inform you of your deadline for reapplying; if you miss that deadline, any unpaid interest will be capitalized, or added to your principal balance. To avoid capitalization, which will increase the amount of interest you’ll ultimately pay, make sure you reapply on time.

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Understanding basic student loan repayment plans

Basic repayment plans don’t depend on your income and include the standard, graduated and extended repayment plans. Unless you elect otherwise, you’ll automatically be on the standard plan; contact your loan servicer to switch to a graduated or extended plan.

Plan nameTerm length (years)Nerd Note
Standard repayment10You'll save the most money on this plan.
Graduated repayment10Your payment will start low and gradually increase every two years.
Extended repayment
25You'll have lower monthly payments but pay more in interest with this plan.

Though the graduated and extended plans are typically not the best options compared to the income-driven plans, they can be right for some borrowers — especially those who don’t want to deal with reapplying for an IDR plan each year, says Diane Cheng, a senior research analyst at the Institute for College Access and Success.

Regardless of which repayment plan you’re on, you can always pay extra toward your federal student loans. Just remember to tell your student loan servicer to apply the extra payment to your balance instead of counting it toward your next monthly payment; that will help you pay off your debt faster.

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Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @teddynykiel.

NerdWallet Staff Writer Brianna McGurran contributed to this report.

This article was updated on Feb. 14, 2017