How Student Loan Repayment Plans Can Impact the Total Amount You Pay
As discussed in our 2023 Guide to Student Loan Options, selecting the right student loan repayment plan can have an impact on your ability to pay your student loan debt.
“I pay $400-plus per month in payments and after two years of payment, I’ve only paid $1,000 toward principal toward one of my loans and the rest of the loans keep building interest. Next year I will start making $800 per-month in additional payments. Even with $1,200 per-month payments, I won’t be able to cover the monthly interest and will never be able to pay the debt off.”
-Erin Murphy’s story (as recorded by Saving for College)
In this article, we’ll share payment plan options by loan type to help you determine which type of student loan repayment plan to pursue.
Compare Private Student Loan vs. Federal Student Loan Repayment Plans
There is an important distinction to be made between federal and private student loan repayment plans and its impact on student loan debt because each loan program and loan servicer is different.
Types of Federal Student Loan Repayment Plans
Standard Repayment Plans
According to Federal Student Aid, an Office of the U.S. Department of Education, a standard repayment plan has the following features:
- Loan term: 10 years
- Higher monthly payments
- Less interest to pay over time
*This could be a good student loan repayment plan if you want to pay less interest over time and think you can make higher monthly payments.
Graduated Repayment Plans
A graduated repayment plan has a few different features to consider, as highlighted by the Federal Student Aid office:
- Loan term: 10 years
- Lower monthly repayment amount to start, increasing every two years (Not tied to your income like a pay as you earn or income-driven plan)
*This could be a good student loan repayment plan if you’re confident you will earn more income toward the last 10 years of your loan term. If not, you may not be able to make the high monthly payments.
Extended Repayment Plans
According to Federal Student Aid, an extended repayment plan is similar to a graduated repayment plan with slightly different terms:
- Loan term: 25 years
- Monthly payments start low and increase over time
- Available to students whose loan balance is over $30,000
- Expect to pay more interest over time
*This option could be a good repayment plan if you want more time to pay off your loan with lower monthly payments. However, you will pay more interest over time, as noted above.
Income-Driven Repayment Plans
Another repayment plan option is income-driven repayment plans:
- Loan term: 20 - 25 years
- Four income-driven repayment plan options with federal student loans:
- (1) Income-Based Repayment Plans
- (2) Income-Contingent Repayment Plans
- (3) Pay As You Earn
- (4) Revised Pay as You Earn
- End of loan term, remaining balance is forgiven
One of the misconceptions about student loan forgiveness is that the government will forgive your remaining balance and you can move on. For certain states, loan forgiveness is not that simple.
Types of Private Student Loan Repayment Plans
Immediate Repayment Plan
With immediate repayment plans for student loans, you start making full monthly payments right away, according to Credible.com, while you're in school - this includes the principal balance and interest.
*Good payment plan if you have a well-paying job while you’re in school and want to pay less interest over time.
Interest-Only Repayment Plan
Interest-only repayment plans allow you to start paying off your loan while you're still in school without having to make full monthly loan payments.
While it may not seem very beneficial to pay only interest, in doing so you should be able to manage your loan balance so it doesn’t grow while you are in school.
*Good payment plan if you have some money to put toward your student loan payments while you are in school.
Partial-Interest Repayment Plan
If you want to start paying on your student loans while you’re still in school but need the payments to be low, a partial interest repayment plan for student loans may be a good option.
You’ll pay a low fixed amount each month, but it will help you cover some of the interest you owe.
*This could be a good student loan payment plan if you have little money to pay toward your student loans while you’re in school but still wanting to manage the interest.
Income-Driven (Income-Based) Repayment Plans
Income-driven (income-based) repayment plans are directly tied to your income. Repayment amounts are designed to be affordable and adjust based on how much you earn.
According to Saving for College, most private lenders do not offer IDR/IBR plans as an option for repayment on student loans. However, the reason we have included it here is because Edly Student Loans from FinWise Bank offer this feature.
With an income-based repayment loan available through the Edly website, students’ payments are based on their income upon finishing college, factor in times of financial hardship and include a cap on the number of payments and total amount of repayment that must be made.
*IDR/IBR plans could be a great option if you want to pay as you earn, have grace periods if you lose your job or earn below the minimum income threshold, and ensure you aren’t spending a lifetime paying off student loan debt.
Deferred Repayment Plans
Student loan deferment allows you to pause student loan payments for a time throughout your loan term. Some student loans also have a deferred repayment plan option so you do not have to start making payments until you finish school.
One of the common misconceptions with deferred repayment plans is that you aren’t accruing interest, which isn’t true.
With a subsidized federal student loan, payments are automatically deferred and you do not accrue interest while you are in school or during deferment periods. That is not necessarily true for private student loans. With an Edly Student Loan, funded by FinWise Bank, borrowers in repayment may request deferment (forbearance) for hardship, including loss of job or failure to find a job that pays at least $30,000 annually.
*An option to consider if you cannot afford to pay on your loans during school.
Graduated Repayment Plans
This is similar to graduated repayment plans with federal student loans, but your lowest payment period is the first year after graduation, according to Saving for College. During this time, your payments are paying off loan interest.
Once a year has passed, you will begin paying the full monthly loan payment to cover both the principal and interest.
What Should You Look for in a Student Loan Repayment Plan?
There are a few key features we would recommend looking at as you decide on a student loan repayment plan:
Achievable Monthly Payments
If you can’t make your monthly student loan payments, you will struggle to pay your student loan debt. You may have to resort to forbearance or deferments, allowing interest to grow on your principal balance and potentially negatively impacting your credit score— more specifically known as your FICO score.
Look for a monthly student loan payment that is doable for you to pay based on your income.
Less Interest Over the Course of the Loan
(Don’t solely focus on the interest amount)
One of the reasons we talk so much about interest rates for student loans is to help you see that the lowest interest rate won’t necessarily accrue the least amount of interest on your student loans.
A low, fixed interest rate for 30 - 50 years may not necessarily compare favorably to an income-driven loan you can pay back within 10 years, even if the income-driven loan is at a higher interest rate.
In most cases, the repayment terms of your student loans have a greater impact on how much interest you pay over time. The College Investor explains it: “Doubling the repayment term more than doubles the total interest you pay over time.”
A Repayment Plan with a Cap on Payments
Life happens: job losses, not getting the job you wanted right away, etc. Students shouldn’t be drowning in debt their whole lives as they work to pursue their career and make their student loan payments. The passage below from a first-person article that recently appeared on the Business Insider website shows what can happen when repayment amounts are not capped and circumstances make repayment difficult:
"At 31 years old, I never thought I'd be nearly $100,000 in debt - and that's just for student loans. I left Northern Arizona University more than a decade ago, before I could officially graduate in 2013. Since then, my student-loan debt has more than doubled.
I currently work full-time as a senior account executive at a brand-marketing and public-relations company, where I make $70,000 a year. Since I couldn't afford the original $1,000 monthly payment, I pay $500 a month toward my loans. Paying half allows me to afford living expenses and other bills, but my student-loan payments only cover the interest...
My minimum monthly loan payments are currently set at $980, but I still can only afford to pay $500. I'm currently 'behind' about $2,600 in payments.”
In keeping with our guiding principles, loans made available through the Edly platform aim to ensure a positive borrower experience. Among many other principles, some of the most relevant to this conversation include:
- Providing a reasonable minimum income threshold below which borrowers will not need to make IBR loan payments because it would be an economic hardship.
- Establishing a reasonable cap on the total amount of payments a student has to make, related to the cost of their tuition.
- Working with student loan borrowers throughout their loan term to ensure it is continuously implemented fairly.
Sources:
Association of American Medical Colleges
Consumer Financial Protection Bureau
Federal Student Aid: Deferment and Forbearance
Federal Student Aid: Extended Repayment Plans
Federal Student Aid: Graduated Repayment Plans
Federal Student Aid: Income-Driven Repayment Plans
Federal Student Aid: Standard Repayment Plans
Saving for College: Debt Stories
Saving for College: Graduated Repayment Plans
Saving for College: Private Loans for IBR
University of Florida Office of Student Financial Aid and Scholarships
