T here is a general trade-off between your lower monthly payment and a higher total repayment amount.

Even if you choose a payment plan that reduces the total monthly payment, you’ll still want to pay more than the minimum required.

Two factors that influence the right choice for you:

  1. How much income you make, and
  2. Whether you file your taxes jointly with a spouse.

Let’s break the income-based plans down by percentage of income

10% of income:  REPAYE and PAYE

The REPAYE plan is a better choice for a single person rather than a married individual. The payment calculations include your spouse’s income, whether you file separately or not. The monthly payment can be higher than a standard repayment plan – the amount depends completely on the level of income you (and your spouse) bring in each year. Loan forgiveness is available after 20 years on this plan.

The PAYE plan also calculates monthly payments based on 10% of your annual income. Unlike the REPAYE program, the amount paid each month cannot exceed the monthly payment of the standard 10-year program. However, if your income increases too much, you won’t be eligible for the program anymore. This program is specialized for those whose debt is high in comparison to income. If you remain eligible, loan forgiveness is available after 25 years.

10–15% of discretionary income

The IBR – or Income-Based Repayment – Plan bases the monthly payment amount at 10–15% of your income. Payments depends on your family size. If you have children, this is a plan for you to consider. The monthly amount won’t be higher than the standard plan, but you will pay more over time. Like the PAYE program, this plan requires a high debt to income ratio. Loan forgiveness is also available after 20 or 25 years.

With the Income Based Repayment plan you could have your debt significantly reduced or even temporarily eliminated (depending on your financial situation).

Other options to capitalize on

The Income-Contingent Repayment calculates two possible monthly payments and chooses the lower of these two options:

  1. 20% of discretionary income
  2. Amount of a fixed payment for a 12-year repayment plan, adjusted for annual income

Payments are based on income, family size, and debt amount. The monthly payment can be higher than the standard plan, so there are no income restrictions to consider if you land an unexpected promotion. This plan is also good for homes with children. Any outstanding balance after 25 years is forgiven.

The Income Sensitive Repayment plan varies from lender to lender. It is based on a specific formula and is worth calling your lender to ask about. Loan terms are up to 15 years. The shorter loan term is a nice way to avoid paying extenuated interest rates over time.

Over the course of repaying the loan, a lower monthly payment means you are paying more interest and less of the principal amount. This pushes off paying off the loan in its entirety – you will be paying it for a longer amount of time – unless you pay more than the minimum. Any extra amount paid above the minimum goes directly to the principal. The principal that must be paid down to pay off the loan. The takeaway: Target the principal!