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Enrolling in REPAYE or another Department of Education income-driven repayment program can reduce your monthly student loan payments by stretching them out over as long as 25 years.

Income-driven repayment plans — which cap your monthly payments at a percentage of your discretionary income, usually 10 percent or 15 percent — can be a good solution for student loan borrowers who are in a bind. An income-driven repayment plan can make sense if:

  • You cannot afford to make your monthly student loan payments
  • You are in danger of defaulting or missing loan payments
  • You are entering a profession that will qualify you for Public Service Loan Forgiveness after 10 years.

But if your monthly payments are manageable, you might think twice about any move that lengthens your loan term — it could cost you more in interest payments in the long run.

Income-driven repayment plans lower your monthly payments by stretching them out over a longer period of time, up to 20 or 25 years. All other things being equal, a longer loan term usually means you’ll pay more in total interest over the life of your loan.

The Department of Education offers a repayment estimator that lets you see how much you can expect pay over the life of your loans in each of the government’s repayment plans (Note that you don’t have to log in to the site to use the repayment estimator — you can just hit “proceed” if you don’t have an FSA ID).

The chart below, generated by the Department of Education’s repayment estimator, shows how much $26,946 in direct subsidized federal student loans with a 4.3 percent interest rate would cost a borrower to repay under all seven different repayment plans available to federal student loan borrowers.

How much it really costs to repay $27,000 in undergraduate student loan debt

Repayment plan First monthly payment Last monthly payment Total amount repaid Loan repayment term
Standard $277 $277 $33,201 10 years
Graduated $155 $466 $34,771 10 years
REPAYE $102 $331 $40,890 17 years
PAYE $102 $277 $40,957 17 years, 5 months
IBR $152 $277 $36,222 12 years, 11 months
IBR for new borrowers $102 $277 $40,957 17 years, 5 months
Income-contingent repayment (ICR) $176 $215 $37,761 16 years, 1 month

Source: U.S. Department of Education repayment estimator. Table is based on a borrower with $26,946 in direct subsidized federal student loans at 4.3 percent interest, and $30,000 in adjusted gross income.

The table above assumes a borrower with the average level of debt for those graduating from a public four-year university, with adjusted gross income of $30,000. Adjusted gross income is how much taxable income you report to the IRS after deductions. Note that monthly payments increase under REPAYE and other income-driven plans based on projected annual salary increases.

As you can see, the longer the loan term, the greater the total amount repaid. If the borrower in the above situation had also taken out an additional $40,000 in unsubsidized direct federal loans to attend graduate school at the current interest rate of 5.8 percent, the differences in outcomes between repayment plans are even more dramatic (see chart below). We’ll increase this hypothetical borrower’s adjusted gross income to $40,000 at the outset, to reflect the boost in earning power they’d presumably get from a graduate degree.

How much it really costs to repay $67,000 in undergrad and grad school debt

Repayment plan First monthly payment Last monthly payment Total amount repaid Loan repayment term
Standard $717 $717 $85,981 10 years
Graduated $406 $1,219 $90,926 10 years
Extended fixed $399 $399 $119,716 25 years
Extended graduated $290 $639 $130,682 25 years
REPAYE $185 $816 $131,502 25 years
PAYE $185 $612 $87,704 20 years
IBR $277 $717 $113,981 18 years, 9 months
IBR for new borrowers $185 $612 $87,704 20 years
Income-contingent repayment (ICR) $469 $626 $95,722 14 years

Source: U.S. Department of Education repayment estimator. Table assumes borrower with $26,946 in direct subsidized federal student loans at 4.3 percent interest, $40,000 in unsubsidized direct federal graduate school loans at 5.8 percent, and $40,000 in adjusted gross income.

For borrowers with a lot of grad school debt, PAYE and IBR for new borrowers stack up quite favorably to the standard and graduated repayment plans, even though the standard and graduated plans have shorter repayment terms.

But that’s mainly because PAYE and IBR for new borrowers provide loan forgiveness after 20 years. In this case, our hypothetical borrower would have $45,962 in outstanding loan debt forgiven after writing 240 monthly checks over two decades in PAYE or IBR for new borrowers.

(To qualify for PAYE you must be a new borrower as of Oct. 1, 2007, and have received a disbursement of a Direct Loan on or after Oct. 1, 2011. IBR for new borrowers is restricted to those who took out their first loan on or after July 1, 2014. Other less restrictive income-driven repayment programs, like REPAYE and ICR, also offer loan forgiveness, but on less generous terms.).

But loan forgiveness comes with a catch: the IRS considers the amount forgiven as taxable income. So be prepared to get hit with a big tax bill if you qualify for forgiveness (student loan debt forgiven after 10 years under the Public Service Loan Forgiveness program is not taxable).

Not everyone will qualify for PAYE and IBR for new borrowers — those who earn too much, or whose loans are older, aren’t eligible.

The latest income-driven repayment plan, REPAYE, is open to any borrower with eligible federal student loans. But REPAYE is less generous to borrowers with grad school debt, who must make 25 years of payments before they qualify for loan forgiveness. In the second scenario above, our hypothetical borrower enrolling in REPAYE with grad school debt would pay back more money than in any other repayment plan, and have only $4,033 in principal and interest forgiven after making 300 monthly payments.

Do your research

Refinancing the high-interest graduate school loans in the second chart above into a 10-year, fixed-rate loan at 4.6 percent interest could reduce your total monthly payments by $24 a month, and the total amount repaid by $2,831.

Many borrowers are paying much higher rates, particularly on older grad school loans. Direct PLUS loans taken out by grad school students or parents from July 2006 through June 2013 carried a 7.9 percent interest rate. Rates on Federal PLUS loans made from July 2006 through June 2010 through the Federal Family Education Loan (FFEL) program were 8.5 percent.

The average borrower refinancing saves $18K with Credible. Find out how much you can save in 2 minutes →

To see how much you might save by refinancing with a private lender, you can compare rates offered by vetted lenders competing for your business on Credible.com, a multi-lender marketplace. It takes about two minutes to compare the actual rates you’ll qualify for with multiple lenders on the Credible platform, without sharing your personal information with lenders or affecting your credit score.

A recent analysis found borrowers who refinanced their student loan debt with lenders on the Credible platform with the goal of reducing their interest rate, loan term and total amount repaid should expect to save $18,668 over the life of their loan.

Those borrowers, who had an average of $56,202 in student loan debt outstanding, will realize those savings through interest rate reductions of 1.71 percentage points on average, and shorter loan terms on their new loans (about 5 years on average). This group of borrowers was willing to increase their monthly payments by $151, on average, to pay off their debt more quickly and maximize their long-term savings.

If your goal is to reduce your monthly payment by extending your loan term, refinancing with a private lender at a lower interest rate can reduce or eliminate the additional interest payments that you’d otherwise make if you stretched out your payments without an interest rate reduction.

Borrowers who used Credible to decrease their monthly repayments by refinancing into loans with longer repayment terms cut their monthly payments by an average of $218 a month. This set of borrowers — who had an average of $49,041 in student loan debt — achieved interest rate reductions of 1.36 percentage points, on average. But because they increased their loan terms (by 4 1/2 years, on average) they can expect to pay slightly more in the end ($5,051 on average) to retire their debt.

If you qualify to refinance at a lower rate, refinancing into a loan with about the same repayment term can lower your monthly payment AND reduce the total amount of interest payments you make over the life of your loan.

The bottom line

Refinancing federal student loans with a private lender isn’t for everyone. You’ll give up some borrower benefits, including access to income-driven repayment plans and the potential for loan forgiveness after 10, 20 or 25 years of payments.

But as we’ve seen, income-driven repayment plans and loan forgiveness have their pros and cons. Extending your loan term to reduce your monthly payment without reducing your interest rate means you could pay much more over the life of your loan. And unless you qualify for Public Service Loan Forgiveness, you could be facing a hefty tax bill if you have a large amount of principal and interest forgiven after making 20 or 25 years of payments in a government repayment plan.

Borrowers with good credit and steady incomes can often save thousands by refinancing their student loans with a private lender at lower interest rates. But according to a recent survey by Citizens Bank, less than half of millennials have looked into refinancing, consolidation, or other options to improve their loan terms.

Paying down student loan debt can be a crucial step toward realizing long-term financial goals like becoming a homeowner or saving for retirement. If you’re exploring your options, do your research and decide what makes the most sense for your situation.

That research should include not only government repayment programs, but checking rates and terms offered by private lenders.

Ashley Eneriz is a freelance writer based in California who’s written about personal finance topics including budgeting, retirement, student loans, banks, and refinancing.