How to Choose the Best Student Loan Repayment Plan

Quick Answer

The federal government offers several repayment plans, but there's no single best one for everyone. Understanding your situation and your options can help you determine which one is right for you.

Students, friends and group studying with laptop at park outdoors. Education scholarship, learning teamwork and happy people, black man and women with computer for research at university or college.

If you have federal student loans, switching to a different repayment plan could help you better align your repayment with your budget and financial goals. Understanding your situation and all of your options can help you determine which student loan repayment plan is best for you. Here's how you can do it.

1. Review the Different Repayment Plans

The federal government offers seven repayment plans from which you can choose. Here's a quick summary of each one.

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.

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.

Extended Repayment Plan

Extended repayment allows you to lengthen your repayment term to up to 25 years, with either 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.

Saving on a Valuable Education (SAVE) Plan

The SAVE plan, previously the Revised Pay As You Earn (REPAYE) plan, is an income-driven repayment plan. More specifically, it can reduce your monthly payment to 10%—in July 2024, it'll drop to 5%—of your discretionary income. Discretionary income is calculated as the difference between your income and 225% of the federal poverty guideline for your state of residence and family size.

If your income falls below the 225% threshold, you'll have a monthly payment of $0. And if your monthly payment can't cover accruing interest on your loans, your loan servicer won't add the extra interest to your balance, a significant benefit.

If you still have a balance after the repayment period (10 to 25 years, depending on your original loan balance), you may be able to receive forgiveness for the remaining amount.

Pay As You Earn (PAYE) Plan

The PAYE plan sets your monthly payment at 10% of your discretionary income, which is calculated as the difference between your annual income and 150% of the federal poverty guideline.

Your repayment period will be extended to 20 years, and anything that's not paid off by that time will be forgiven. You may qualify for the PAYE plan if you have a high debt burden relative to your income.

Income-Based Repayment (IBR) Plan

With this plan, your monthly payment will be set at either 10% or 15% of your discretionary income—the difference between your annual income and 150% of the federal poverty guideline—depending on when you received your first loans.

Additionally, 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 the IBR plan, you'll need to prove that you have high debt relative to your income.

Income-Contingent Repayment Plan (ICR)

The ICR plan is available to all federal loan borrowers, and it's the only income-driven repayment plan that parents with PLUS loans can use. Your monthly payment will be the lesser of:

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

Any amount that's left over after 25 years will be forgiven.

2. Calculate How Much You Can Afford to Pay a Month

As you review the different repayment options, your budget can help guide you. If you don't already have one, you can get started with creating a budget by looking at your income and expenses over the past few months, categorizing expenses so you know where your money is going.

Based on your current spending, calculate how much you can realistically put toward your student loans each month. If you can pay more than your current payment amount, you may not need to switch to a different plan, or you may consider paying off your loans faster. But if things are tight, you may consider an income-driven repayment plan.

At the same time, consider ways you can cut back a little on your discretionary spending to make more room for student loan payments.

3. Think About Your Goals

Once you have a good idea of your current financial situation, think about what you want to accomplish with a new repayment plan. Here are some goals you might consider.

You Want to Lower Your Monthly Payments

If you're struggling to keep up with monthly payments, you may consider any of the income-driven repayment plans, the graduated repayment plan or the extended repayment plan.

Just remember that with the graduated repayment plan, your payment will 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.

You Want to Save on Interest

Unfortunately, the U.S. Department of Education doesn't offer opportunities to get a lower interest rate on your federal loans. However, if you switched to a longer repayment plan in the past, you'll ultimately pay more interest over the life of the loan. If you can afford a higher monthly payment, it could make sense to switch back to the standard repayment plan.

You Want to Qualify for Student 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.

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

You Don't Want Payments Tied to Your Salary

While an income-driven repayment plan can be nice if your income is low, it may not have much of an impact on your payment if your income is high.

What's more, you're required to recertify your income each year, which could result in your payments increasing over time. If you prefer a more predictable repayment plan, consider the standard, graduated or extended options.

4. Understand the Long-Term Costs

While some plans may save you money now in the form of a reduced monthly payment, extending your repayment term may result in more interest charges over the life of the loan.

This is particularly true with most income-driven repayment plans, excluding the SAVE plan. If your monthly payment isn't enough to cover accrued interest, that interest will be added to your balance, resulting in more total debt over time.

Also, while student loan forgiveness is currently not taxable at the federal level through 2025, there's no guarantee it'll stay that way. In addition, some states may still treat your forgiven debt as taxable income.

5. Contact Your Loan Servicer

Once you've decided which repayment plan is best for you, contact your loan servicer to submit your change request. Your loan servicer can also help you make sure you've picked the right option for you.

If you're considering an income-driven repayment plan, you may need to submit income documentation. If you don't know who your loan servicer is, you can find out by logging in to your Federal Student Aid account.

6. Consider Refinancing

Another way to get a different repayment plan is to 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 the refinancing route, be sure to check your credit scores beforehand to make sure you're in a good position to qualify.

What Student Loan Repayment Plan Is Best for Me?

There's no single student loan repayment plan that works best for everyone. But depending on your situation, the one you're currently on may not be best suited for you. Carefully consider your needs and goals, then review the different options to determine which plan is a better fit.

If you're worried about balancing short-term benefits and long-term costs, keep in mind that you can change your repayment plan again in the future—unless you refinance with a private lender, in which case you can't switch your loan back to a federal repayment plan.

As you consider your options, consider monitoring your credit to gauge your overall credit health, and make it a priority to pay your student loans on time to build and maintain good credit.