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If you’re paying back federal student loans, you have many options when it comes to repayment plans. But the best way to figure out the best repayment plan for you, is to focus on what goals you want to achieve.

Which of these best describes your situation?

If you want to lower your monthly payments

There are two ways a repayment plan can lower your monthly payments:

  1. By stretching your payments out over a longer period of time
  2. By limiting your monthly payments to a percentage of your income

Stretching your payments out over a longer period of time

Outside of income-driven repayment, there are two repayment plans that stretch your payments out over a longer period of time:

  1. Extended repayment plan: Fixed monthly payment for up to 25 years
  2. Graduated repayment plan: Monthly payment gradually increases over 10 to 30 years

The extended and graduated repayment plans were created before income-driven repayment plans became available. The main drawback to these plans is that they don’t provide loan forgiveness. But they may still be useful if you don’t expect to qualify for loan forgiveness, and want to know exactly what your monthly payments will be every month.

If you’re paying back multiple loans with a large loan balance, you may also be able to stretch out your repayment term by combining them into a federal direct consolidation loan.

The downside to stretching your payments out over a longer period of time is that you’ll usually end up paying more in interest — unless you can qualify for loan forgiveness in an income-driven repayment program.

Limiting your monthly payments to a percentage of your income

Income-driven repayment plans lower your minimum monthly payment to a percentage of your discretionary income — 10%, 15%, or 20%, depending on the plan. If you have no discretionary income, your monthly student loan payment is zero.

There are four main IDR plans:

  • Income-Based Repayment (IBR)
  • Pay As You Earn (PAYE)
  • Revised Pay As You Earn (REPAYE)
  • Income-Contingent Repayment (ICR)

IBR and PAYE require that you demonstrate a partial financial hardship, which is determined by income, family size, and loan amount. Any borrower with eligible loans can enroll in REPAYE or ICR.

If you qualify to enroll in an IDR plan, it will probably take you longer than the standard repayment term of 10 years to pay off your loans. So it’s likely you’ll pay more interest.

But if you’re employed by the government of a qualified non-profit, you may qualify for loan forgiveness after 10 years of payments in an IDR plan. Any borrower can qualify for loan forgiveness after 20 or 25 years of payments in an IDR plan, regardless of who they work for.

Because your monthly payments in an IDR plan can change once a year as your income fluctuates, it can be a little unpredictable.

If you want to pay the least interest

As a rule of thumb, the faster you pay off your loans, the less interest you’ll pay. That makes the standard, 10-year repayment plan the best choice if you want to pay the least interest.

There’s one very important exception: If you work for the government or a qualified nonprofit and will qualify for Public Service Loan Forgiveness, you’ll pay the least interest in an income-driven repayment plan.

If you won’t qualify for Public Service Loan Forgiveness, but can’t afford the monthly payments on the standard 10-year repayment plan, an IDR plan can still be a good choice. Remember that you can always make more than the minimum payment to save on interest charges if you don’t expect to qualify for loan forgiveness.

Learn More: Should I Pay Off My Student Loans Early?

If you want to qualify for loan forgiveness

If you work for the government or a qualified nonprofit, you could qualify for Public Service Loan Forgiveness after making 120 qualifying monthly payments. The best repayment plan is an income-driven repayment plan like PAYE, REPAYE, IBR or ICR.

Payments you make in the standard 10-year repayment plan also count toward Public Service Loan Forgiveness. But if you stay in the plan for 10 years, you’ll pay your loans off before qualifying for loan forgiveness.

How to avoid choosing the wrong repayment plan

There are pros and cons to every repayment plan. To help you get an idea of what your monthly payment and total repayment costs will be, check out the Department of Education’s repayment estimator.

The repayment estimator won’t help you evaluate what you might save if you refinance your student loans with a private lender at a lower interest rate, however. So, keep that in mind if that’s something you’re considering.

Find out if refinancing is right for you

  • Compare actual rates, not ballpark estimates – Unlock rates from multiple lenders with no impact on your credit score
  • Won’t impact credit score – Checking rates on Credible takes about 2 minutes and won’t impact your credit score
  • Data privacy – We don’t sell your information, so you won’t get calls or emails from multiple lenders

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About the author
Matt Carter
Matt Carter

Matt Carter is a Credible expert on student loans. Analysis pieces he’s contributed to have been featured by CNBC, CNN Money, USA Today, The New York Times, The Wall Street Journal and The Washington Post.

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