Read this if you want to know if you’re in the best repayment plan for your specific financial situation. Estimated read time ~5 minutes.
Repayment plans are the start of your student loan repayment journey. The right plan keeps you from worrying you won’t be able to make your monthly payment and sets an end date for student loan freedom. The wrong plan has you financially stretched or paying more slowly than you could be.
This article will give you the key tenants of choosing a repayment plan so you can customize your repayment to fit your financial needs. If your plan’s not doing it for you anymore it’s time to say buh-bye!
Duration of Repayment
How long will it take you to repay your loans according to this plan with no missed or extra payments? The plan you choose determines when you’re debt free. If you want to be out of student loan debt in 10 years look at the standard 10 year repayment plan.
Cost of Monthly Payment Relative to Your Income
Repayment plans offer either a fixed monthly amount with a set duration or a variable amount that gets re-calculated with changes in your income. The income-based repayment plans offer the most flexibility in terms of your payment relative to your income. However a standard 10 year plan offers a clearly defined timeline for repayment.
Your financial situation will determine which option is best for you at the time. For example maybe you would like to be out of debt in 10 years but the monthly payment under the 10 year repayment plan is unaffordable right now on your starter salary. You can always choose an income-based plan first and change to a more aggressive repayment plan as your income allows.
Loan Forgiveness Options
Are payments made under this repayment plan eligible for loan forgiveness? This is a critical piece of information to know if you’re considering loan forgiveness of any type. If you’re working toward loan forgiveness such as PSLF you’re required to make 120 payments on an eligible income-based repayment plan. If you change plans or consolidate your loans you could have to restart your 120 payments from the beginning and lose all the progress you made so far.
Advantages and Disadvantages of the Repayment Plan
What are the advantages and disadvantages of your repayment plan? Standard repayment plans minimize the amount you pay in interest and help you repay your loans more quickly but have high monthly payments that don’t take your income into account so may be unaffordable for some borrowers. Income-based plans have low monthly payments but stretch out the time it takes to repay your loans which means you pay more interest and it will take you longer to become debt free.
Target Borrower for the Repayment Plan
Who is the ideal candidate for your repayment plan? Some plans work very well for high-income borrowers and less well for lower-income borrowers. For example, an income-based repayment plan may not be the best choice for a high-income borrower who would rather have a set monthly payment and repay their debt over 10 years. In contrast an income-based plan might be a great option for someone in a starter job not making their goal salary yet. You’ll need to compare your financial situation to the target borrower for the plan and decide if the plan makes sense for you.
Choosing the right repayment plan involves deciding your specific loan repayment goals and finding the plan that can make those goals come to life. All federal loan repayment plans can be changed at any time by contacting your loan servicer. If you’re not in the right repayment plan, break up with it for a better one, you won’t even need to burn all of it’s old things 🙂
After reading this post are you planning to kick your plan to the curb for something better or are you and your plan meant to be? Let me know in the comments below or on the Repayable Facebook Page. As always you can send me an email jeni@repayable.org or post your question in the Facebook group and I will help you navigate the minutia of plan choice.
Additional Resources
Repayable: Chapter 3 Ways to Repay
Federal Student Aid Overview of Repayment Plans
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