How to Choose the Best Student Loan Repayment Plan for You

group of young adults happy to save money

The best student loan repayment plan for you will depend on the type of student loans you have, your financial need, your financial goals and a few other factors.

Typically, only federal student loans allow you to choose a different repayment plan after you've started making monthly payments. Here's what you need to know about each and how to pick the right one for you.

Student Loan Repayment Plans

If you have federal loans, you may have up to seven different repayment plans from which you can choose. Depending on the plan you choose, your payments may remain the same throughout the life of your loans, or they may change over time.

Here's what you need to know about each plan.

Standard Repayment Plan

This is the plan you typically start out on when you first get federal loans. Your payments remain fixed for the life of your loan, which is typically 10 years but can be as much as 30 years if you consolidate your loans.

All federal student loan borrowers can choose this plan.

Graduated Repayment Plan

With this plan, you can keep the 10-year repayment term but start off with lower payments and have them increase—usually every two years—over time. If you consolidate your loans, you can extend the term to up to 30 years.

All federal student loan borrowers can opt for graduated repayment.

Extended Repayment Plan

Extended repayment allows you to lengthen your repayment term to up to 25 years. Depending on which option you choose, you can have fixed or graduated payments during that time.

To qualify for this plan, you need to have at least $30,000 in federal student loan debt.

Revised Pay As You Earn Repayment Plan (REPAYE)

The REPAYE plan is the first of four income-driven repayment plans. Your monthly payment will be 10% of your discretionary income, which is calculated as the difference between your annual household income and 150% of the poverty guideline for your family's size and state of residence.

Your payments will be recalculated every year as your income and family size changes. Your repayment term will also increase to 20 or 25 years, depending on the type of loans you have, and any amount that's left over at the end of the term will be forgiven. Note, however, that any amount that's forgiven under an income-driven repayment plan may be considered taxable income.

Most federal loan borrowers can qualify for the REPAYE plan. However, parents who take out PLUS loans are not eligible.

Pay As You Earn Repayment Plan (PAYE)

Similar to the REPAYE plan, the PAYE plan sets your monthly payment at 10% of your discretionary income. The biggest difference is that while your payment can increase as your income increases, it will never be set higher than what you would have paid on a 10-year standard repayment plan. Your payments are recalculated each year.

Also, to qualify for this plan, you need to show financial need, specifically that you have a high debt burden relative to your income. Your repayment period will be extended to 20 years, and anything that's not paid off by that time will be forgiven.

Parents with PLUS loans are not eligible for the PAYE plan.

Income-Based Repayment Plan (IBR)

With this plan, your monthly payment will be set at either 10% or 15% of your discretionary income, depending on when you received your first loans. As with the PAYE plan, your monthly payments will never be higher than what they'd be on a 10-year standard repayment plan.

Payments are recalculated each year, and your repayment term will be extended to 20 or 25 years, again depending on when you first got your loans. After that time, the remainder will be forgiven.

To qualify for an IBR plan, you'll need to prove that you have high debt relative to your income. As with the other income-driven repayment plans so far, parent PLUS loans are ineligible.

Income-Contingent Repayment Plan (ICR)

The ICR plan is available to all federal loan borrowers, including parents with PLUS loans. You don't need to prove financial need, and your monthly payment will be the lesser of:

  • 20% of your discretionary income, which is calculated as the difference between your income and 100% of the poverty guideline.
  • The amount you would pay on a repayment plan with a fixed payment over 12 years, adjusted according to your income.

Payments are recalculated each year, and any amount that's left over after 25 years will be forgiven.

Finding the Best Repayment Plan for You

With up to seven plans to choose from, picking the right one could be tough. To narrow down the selection, take a moment to think about your goal. Here are a few you might consider.

Lowering Monthly Payments

All the income-driven repayment plans and a graduated repayment plan will typically lower your monthly payment. Keep in mind, though, that with a graduated repayment plan, your payment will certainly increase over time, regardless of your income.

On the flip side, an income-driven repayment plan will keep your payment at an affordable level based on your income.

Paying Lower Interest

Unfortunately, the U.S. Department of Education doesn't offer opportunities to get a lower interest rate on your federal loans. Even if you consolidate multiple federal loans with a federal servicer, your interest rate will be the weighted average of the loans you're consolidating, rounded up to the nearest one-eighth of 1 percent.

Qualifying for Loan Forgiveness

If you're planning to apply for the Public Service Loan Forgiveness program (PSLF) or a similar program, it may make sense to go with the repayment plan that requires you to pay less money overall.

With PSLF, for instance, you need to make 120 qualifying payments in addition to meeting other requirements. If you have a 10-year standard repayment plan, there won't be anything left over to forgive once you make your qualifying payments.

An income-driven repayment plan is typically best if you're planning to pursue loan forgiveness.

Consolidating or Refinancing Your Federal Student Loans

As previously mentioned, consolidating your federal student loans and keeping them with a federal servicer can simplify your monthly payments. However, it will end up costing you more in the form of a higher interest rate.

Alternatively, you can refinance your federal loans with a private lender. If you have a strong credit history and income profile, you may be able to qualify for a lower interest rate than what you're currently paying.

That said, refinancing with a private lender means that you lose federal benefits, including access to income-driven repayment plans and loan forgiveness programs. So it might not be a great option if you want to hold on to those protections. But if you're not worried about needing them, refinancing could save you money in the long run.

If you're planning to go this route, be sure to check your credit scores beforehand to make sure you're in a good position to qualify.