T here are many types of student loan repayment plans to choose from; picking the right one is a smart move.
Let’s look at two categories of repayment plans:
- Those with a set monthly payment for years to come
- Those with monthly payments that vary from year-to-year
Choose an Amount You Can Count On
Standard Repayment Plan
This program is as simple as it gets. There is a fixed amount due every month for the length of the loan. A single loan may take up to 10 years to pay off. You’ll pay less over time with this plan than any other. Payments each month can be out of your budget, though—this can be a good reason to turn to other plans to meet your needs.
*All other programs are compared in terms relative to this standard plan.
Graduated Repayment Plan
A great choice for people who expect to see their income rise as their business grows. Doctors, lawyers, and other entrepreneurs with an expanding clientele can all benefit from the way this plan is structured. Payments are lower in the beginning years and then gradually increase every two years. The loan length is up to 10 years (for a non-consolidated loan). A lower loan length, i.e. 10 years, means you pay less interest over time.
Extended Repayment Plan
Allows you to choose between fixed or graduated payments for up to 25 years. The extra years give more life to the loan, meaning there is more time to pay it off. This corresponds to lower monthly payments than either plan mentioned above. The lower monthly payment may seem attractive up front – keep in mind that you will be paying a higher total amount over time. A debt amount of at least $30K is required for the extended plan.
With the Income Based Repayment plan our cofounder, Jay, had one payment cut from $250 per month down to $19.00 per month!
Changing with the Times
Income-Based Repayment Plans generate a monthly payment amount based on your income from the previous year. Every year the amount recalculates. Most lenders require that you send in proof of your income through tax returns or paycheck stubs.
The amount of revenue you bring home dictates the payment amount – these plans are well suited for those with a lower income. A zero-dollar payment is not uncommon with an IBR plan. If your income increases, your monthly student loan payments will increase as well.
Occasionally, an income-based plan can adjust with your spouse’s income (in addition to your own). Generally, though, if you file your taxes separately from your spouse, their income will not affect your monthly payments. It is wise to verify this with your individual lender – 10% of your income may be a very different amount than 10% of you and your spouse’s combined income.
In certain cases, you may decide to file taxes together anyway. The tax breaks associated with filing together may offset the increase in student loans payments.
Forgive and Forget
Most income-based repayment plans offer loan forgiveness after 20(+) years. Keep in mind that if your income increases substantially, you may not be eligible to reach that 20-25 year mark. Or, doing so may put you at risk of paying a higher monthly amount than the standard plan. When the remainder of your loan is forgiven, you usually have to pay income tax on that portion.
Whether you choose a set amount or income-based repayment plan, you have the tools to get right with your student loans. For a breakdown of the income-based repayment plans – click here. Repay the red in your financial life. There is a plan for you.