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 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. Here’s what you need to know about each option and how to choose the one that’s best for you.
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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.
The particular plan that’s best for you depends on when you first borrowed, your income and family size. There are four income-driven plans:
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.
Basic 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.
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.
Pick the student loan repayment plan that’s best for you
You don’t necessarily need to understand the nitty-gritty details of every student loan repayment plan to choose the best one.
When you fill out the application for an income-driven plan, you can select “Recommended,” and your loan servicer will put you on the IDR plan with the lowest monthly payment you qualify for. You can also 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.
Still, understanding the basics of the various plans can help you make an informed decision. Here’s what you should know.
INCOME-BASED REPAYMENT
Best if you:
- Have a lot of debt compared to your income.
- First took out your student loans after July 1, 2014.
Income-based repayment caps your monthly payment at 10% or 15% of your discretionary income, and extends your loan term to 20 or 25 years, depending on when you first borrowed. As with all four income-driven plans, your remaining loan balance will be forgiven at the end of your term. You need to have a certain income level based on your family size to qualify for IBR.
PAY AS YOU EARN
Best if you:
- Have a lot of debt compared to your income.
- First took out a federal student loan after Sept. 30, 2007 and borrowed again after Sept. 30, 2011.
Only a small group of borrowers qualify for Pay As You Earn, but those borrowers can typically get lower monthly payments with PAYE than they would on IBR. Like with IBR, you need to have a certain income level based on your family size to qualify for PAYE. If you qualify, PAYE will cap your payment at 10% of your discretionary income, extend your term to 20 years, and forgive your remaining balance after that time period.
REVISED PAY AS YOU EARN
Best if you:
- Have undergraduate loans and can’t afford your monthly payment on the standard plan.
- Have graduate school loans and don’t qualify for IBR or PAYE.
Revised Pay As You Earn is open to all borrowers with federal direct loans, regardless of their income or when they first borrowed. REPAYE caps your monthly payment at 10% of your income and extends your loan term to 20 years if you have undergraduate student loans and 25 years if you have graduate student loans. As with all income-driven repayment plans, REPAYE forgives your remaining balance at the end of your loan term.
However, REPAYE isn’t always the best option for married borrowers. If you’re married, your and your spouse’s combined income will be used to determine your monthly payment, even if you file taxes separately. With other income-driven plans, your monthly payment is based on your income alone if you and your spouse file taxes separately.
INCOME-CONTINGENT REPAYMENT
Best if you:
- Have Parent PLUS loans.
- Can’t afford payments on the standard plan, but can afford to pay more than you would on other IDR plans.
Income-contingent repayment is the oldest of the four income-driven plans and the only one available to borrowers with Parent PLUS loans. It’s the least generous: It typically caps your monthly payment at 20% of your income, as opposed to the 10% or 15% that the other plans offer. It extends your term to 25 years and forgives any remaining loan balance at the end of your term.
ICR can be a good middle-of-the-road option for borrowers who can’t afford monthly payments on the standard plan but can afford to pay more than they would on IBR, PAYE and REPAYE, says Betsy Mayotte, director of regulatory compliance at American Student Assistance, a nonprofit that helps borrowers understand their student loans.
GRADUATED REPAYMENT
Best if you:
- Can’t afford payments on the standard plan.
- Expect your income to increase steadily in the next several years.
On a graduated repayment plan, you’ll have a 10-year term length. Your payments will start out low and then increase every two years — even if your income doesn’t. If you sign up for this plan, you should be confident that you’re in a career in which your income will regularly increase.
EXTENDED REPAYMENT
Best if you:
- Can’t afford payments on the standard plan.
- Want the predictability of fixed monthly payments.
An extended repayment plan will extend your term length to 25 years — that will make your monthly payments more manageable, but increase the amount of interest you’ll pay over time. You can choose to make equal, fixed payments or graduated payments, which start out small and increase every two years.
More from NerdWallet
Guide to federal student loan consolidation
Student loan calculator
Guide to student loan forgiveness
Teddy Nykiel is a staff writer at NerdWallet, a personal finance website. Email: teddy@nerdwallet.com. Twitter: @teddynykiel.
NerdWallet Staff Writer Brianna McGurran contributed to this report.
This article was updated. It was originally published Jan. 21, 2016.
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