Paying student loans off is a challenge for many who borrow them, but borrowers can make smart decisions that will help them successfully pay off their students loans. For instance, borrowers can apply for other types of financial assistance before turning to student loans. They can also make sure they understand the difference between private student loans and various types of federal student loans so they choose the options that are best for them. 

Another important decision is choosing the right type of repayment plan. Private lenders set terms for repayment of private student loans, and repayment terms vary from lender to lender. However, federal student loans offer eight types of repayment plans. Which federal repayment plan works best for you will likely depend on the amount of money you owe and your employment situation upon graduation.

Below is a breakdown of four of the eight repayment plans for federal student loans, including an explanation of how they work and a list of the pros and cons of each plan. The remaining four repayment plans will be addressed in a separate post.

Standard Plan

The standard plan is the default repayment plan. With this plan, your entire student loan debt (including the interest on the loan) is divided into even monthly payments. The plan is designed so that if borrowers make full payments every month, they will completely pay off their student loans in ten years. Students must make their minimum monthly payments every month in order to finish repaying their loans on time, and borrowers who don’t make minimum payments may incur penalties including higher interest charges. However, students are allowed to pay more than their minimum payment (known as “paying ahead”), and doing so regularly can lead to lower interest charges on their loans. 

However, if you owe a lot in loans, these monthly payments can be high. These higher payments can be hard on students just starting their careers because they may have smaller salaries or change jobs frequently before settling into a permanent position. Lower incomes and income fluctuations can make paying student loans difficult.

• has the shortest repayment period

• saves students interest charges by shortening the repayment period

• offers predictable payments that make budgeting easier

• has higher monthly payments that may be hard to manage

Graduated Repayment Plan

The graduated repayment plan starts with low monthly payments that gradually increase every two years. Payments are designed to increase at a rate that will enable borrowers to pay off their loan fully in ten years (just like with the standard plan). However, payments increases will never be more than three times any previous payment. This way, increases are steady, but not overwhelming. 

The graduated repayment plan works on the assumption that students will take lower-paying, entry level jobs when they first graduate, but will move up and earn more over time. These earning increases will then help them make larger payments. One problem with this plan is that sometimes salaries do not increase as quickly as payments do. Also, students with a large amount of student loan debt may not be able to afford payment increases and may not be able to pay off their loans in ten years.

• can have a short repayment period

• monthly payments start low

• inconsistent payments make budgeting harder

• monthly payments make increase faster than your income

• can have a very long repayment period if monthly payments are too large

• not eligible for Public Service Loan Forgiveness (PSLF)

Extended Repayment Plan

Students whose total student loan debt exceeds $30,000 may be eligible for an extended repayment plan. To be eligible, students must have either Direct or Federal Family Education Loans (FFEL). These repayment plans are different from the Standard and Graduated plans because they are designed to be paid off in 25 or 30 years instead of 10. There are two types of Extended repayment plans, Extended and Graduated Extended.

Extended repayment plans are similar to the Standard repayment plan in that the total debt (with interest charges) is divided over even monthly payments. This means students know what they will be required to pay every month for the entire life of the loan, and like with the Standard plan, there are benefits to paying ahead. The Extended Graduated plan is similar to the Graduated plan. It starts with lower payments that increase every two years.

• allow students to pay back loans over a longer period of time

• offer students much lower payments

• students will pay more in interest because they will borrow their loans for longer

• early payments on the Graduated Extended plan will only cover interest charges, not the principle of the loan

• does not qualify for Public Service Loan Forgiveness (PSLF)

Income-Sensitive Repayment Plan

The Income-Sensitive Repayment Plan is available to low-income borrowers using Federal Family Education Loan (FFEL) Program loans. Like with other income-driven repayment plans, payments on the Income-Sensitive Repayment plan are based on your annual income and will change if your income changes. The repayment term on this plan is 15 years, making it a shorter term than other plans like the PAYE and REPAYE plans. However, like with all income-driven plans, borrowers on the Income-Sensitive Repayment plan will pay more over the life of their loan than they would on the Standard Plan.

• offers smaller monthly payments

• has a shorter repayment term than other income-driven plans

• not available to most borrowers

• does not offer loan forgiveness

• borrowers pay more total than they would on the Standard Plan