How to select the best student loan repayment plan

In October, millions of borrowers will be expected to make their monthly student loan payments for the first time in more than three years, but there are a number of repayment options that may ease the transition.

The payment schedule for borrowers will remain the same as it was before the pandemic stop began in March 2020, but if their financial situation has altered, they may wish to think about transferring to an alternative plan.

Additionally, a new repayment plan called SAVE (Saving on a Valuable Education), which debuted this summer, may enable millions of borrowers to make lower monthly payments.

The online “Loan Simulator” provided by Federal Student Aid allows borrowers to compare their anticipated payments under various repayment strategies. By contacting their student loan servicer or filing an application to Federal Student Aid, they are free to change plans at any time.

When considering your payment options, keep the following in mind:

A quick rundown of available plans

Borrowers are automatically enrolled in the Standard Repayment Plan when they begin repayment for the first time, which is a 10-year plan. These payments determine a fixed monthly payment based on the amount of debt a borrower owes and guarantee that it will all be paid off, plus interest, within ten years.

Income-driven plans:

An income-driven plan, of which there are four types, including the new SAVE plan, may be a viable choice if a borrower is having trouble making ends meet each month. These programmes are designed to keep monthly payments affordable for low-income borrowers by calculating payments based on a borrower’s income and family size. There may be no bills at all each month.

Other plans not based on income:

A borrower’s monthly payment could be reduced by the extended and graded repayment plans without taking their income into account. They might be an excellent option for those who expect to earn significant salaries in the future. Payments under the extended plan will be spread over a many of 25 years. Payments under the graded plan start out low and increase over the course of a 10-year period.

What you should do to reduce your monthly costs

Borrowers who believe that their monthly payment under the 10-year standard plan, the extended plan, or the graded plan is too costly may find that income-driven repayment plans are a reasonable alternative. The four plans are known by the acronyms SAVE, Pay As You Earn, Income-Based Repayment, and Income-Contingent Repayment.

These income-driven plans specify that a borrower must contribute a specific percentage of their discretionary income, or the money left over after covering expenses for the family’s basic needs like rent, food, and clothes.

A borrower’s monthly payments often increase under an income-driven plan when their income increases, or decrease when they have less discretionary income. Every year, borrowers must recertify, which means that if their income or family size have changed, payments will alter accordingly.

When it comes to reducing a borrower’s monthly payment, the newest income-driven plan, SAVE, has the most benevolent terms. When fully implemented the following year, it will reduce the repayment obligation for some borrowers with undergraduate loans from the 10% imposed by the majority of income-driven programmes to just 5% of their discretionary income. In order to prevent debt from increasing while a borrower is making payments, SAVE also includes an interest subsidy.

Borrowers who are enrolled in income-driven repayment plans may also be eligible to have their outstanding student loan debt forgiven after making enough qualifying payments. Depending on the borrower and the plan, the duration until forgiveness varies, but it won’t exceed 25 years’ worth of payments.

Depending on the type of federal student loans a borrower has, their income, and the age of the loans, they may be eligible for the income-driven repayment programmes. SAVE is available to the majority of borrowers of federal student loans.

What to do if you want to make the lowest payment over time

The Standard Repayment Plan is typically the one where borrowers are enrolled and pay the least over time. That’s because they’ll complete paying in ten years, giving interest less time to compound.

In the long run, borrowers may pay even less if they “prepay.” They may at any moment pay a higher amount in addition to the minimum. This can result in them paying less overall on the Standard Repayment Plan due to interest.

Parents’ options are limited

Federal Parent PLUS loans, which are not eligible for all repayment options, may be taken out by parents who borrow to assist pay for their children’s education.

Borrowers with Parent PLUS loans, like those with other loans, are automatically enrolled in the Standard Repayment Plan and are qualified to change into the Graduated and Extended Plans.

Income-driven plans do not accept Parent PLUS loans, but there is a workaround. According to the Institute of Student Loan Advisors, a nonprofit that provides free student loan assistance, borrowers are permitted to enrol in one type of income-driven plan – the Income-Contingent Repayment Plan – if they first consolidate their Parent PLUS loans into a Direct Consolidation Loan.

Even if they combine, Parent PLUS borrowers won’t be able to join the newest income-driven plan, SAVE.

It’s important to be aware that, according to with Department of Education rules, the Income-Contingent Repayment Plan will close to new borrowers the next year, with the exception of consolidation loan borrowers who have repaid a Parent PLUS loan.

How getting married may change your payments

For debtors registered in an income-driven plan, marriage could result in a considerable rise because the computation of payments will take into account the income of the spouse.

However, some married borrowers who file their taxes separately may be able to conceal their spouse’s income in order to receive a reduced monthly student loan payment. The SAVE, Income-Based Repayment, and Income-Contingent Repayment plans all reflect this.

After getting married, borrowers who are part of the 10-year standard plan won’t notice a difference.

What to do if you want to be forgiven of your public service loans

If you have a lot of student loan debt and you work for the government or a nonprofit, the Public Service Loan Forgiveness programme may be a fantastic choice for you.

After completing 120 monthly payments, qualifying borrowers will have their remaining student debt forgiven. The SAVE, Pay as You Earn, Income-Based, or Income-Contingent plans, however, must be chosen by them.

The Public Service Loan Forgiveness Programme often excludes borrowers with older Federal Family Education Loans (FFEL) that are controlled by the federal government. However, if those borrowers consolidate their FFEL loans by the end of 2023, they may qualify for a one-time waiver and receive credit for prior payments.