By Matt Becker

When it comes to your student loans, you have a LOT of different repayment options. And if you’re feeling confused about which one to choose, you’re not alone.

This stuff gets complicated FAST, and to be honest I had to take a refresher course myself recently just to make sure I knew exactly what to recommend to my clients.

And in this post I’m going to use what I’ve learned to help you answer one specific question: which student loan repayment plan is right for you?

By the end of this post, you’ll know which repayment plans to avoid, which ones you might qualify for, and why you would choose one over the other.

Specifically, you’ll have the tools you need to answer three big questions:

Which repayment plan is most affordable right now?

Which one will save you the most money over the long-term?

Which one will help you pay off your student loans the fastest?

Since this is a lot of information, I created a cheat sheet for you to make it all as simple as possible. You can click here to get it.

And just to be clear, this post is focused on federal student loan repayment plans. You have far fewer options with private loans, though you may want to look into refinancing, which we’ll talk about in next week’s post.

Also, if you haven’t done so yet I would read my post on organizing your student loans. You will need that information in order to figure out which repayment plans you actually qualify for.

Quick note: A lot of what I know about student loans has come from the AMAZING Heather Jarvis. She has some fantastic resources on her site, so if you’re looking for more information I would definitely check it out: http://askheatherjarvis.com/.

Rule of thumb

Choosing a student loan repayment plan can be a stressful experience. Even with all the information in the world, there’s always the worry that you’re making the wrong choice.

And while there is no one-size-fits-all answer here, there IS a rule of thumb you can use to make that decision a little easier. (There are also some exceptions I’ll explain just below.)

Here it is:

Choose the repayment plan that ALLOWS you the OPTION of a smaller monthly payment.

To be clear, it is NOT always a good idea to minimize your monthly payment. Paying more than the minimum each month can save you a lot of money over the long-term.

But there are two reasons why this rule of thumb generally makes sense:

The smaller required monthly payment gives you more flexibility to ride out any tough financial stretches. You ALWAYS have the option to pay more than the minimum.

In other words, a smaller monthly payment doesn’t restrict you in any way. You can still pay your student loans off much faster if you want. It’s just that you’ll have more flexibility when life throws you a curveball.

Repayment plans to avoid

There are a few student loan repayment plans that are almost always worth avoiding, even given the rule of thumb we just talked about.

For the most part this is simply because over the years the government has introduced better repayment options without getting rid of the old ones. So while these older options are still available, they don’t serve much purpose anymore.

Here are the repayment plans you’ll likely want to avoid.

Extended Repayment

The extended repayment plan simply increases the number of years you have to pay off your student loan. Instead of the standard 10 repayment term, you can extend it to as long as 25 years.

The “benefit” is that it lowers your required monthly payment. But the downside is that you’ll end up paying MUCH more interest over the life of the loan, which means less money available for your other financial goals.

But the big reason to avoid extended repayment is simply that with the advent of income-driven repayment plans, which we’ll talk about below, there are better ways to extend your repayment period and minimize your monthly payment.

So in general, the extended repayment plan just results in paying more money over time without any of the potential benefits of the newer income-driven repayment plans.

Graduated Repayment

Instead of increasing the length of the loan, the graduated repayment plan reduces your monthly payment for the first few years and then slowly increases it over time.

In other words, you pay less each month now but you’ll pay more each month later.

It was designed to help people who are starting their professional career with a smaller income but expect it to increase quickly. Theoretically the smaller initial payment will be easier to afford early on and you will be able to handle the bigger monthly payment down the road.

And while this used to make sense in certain situations, there are now a few reasons why it should mostly be avoided:

Because your initial monthly payments are smaller, you end up paying more interest over time than you would under standard repayment. You always have the OPTION of paying more than the minimum, so why choose a plan where you will eventually HAVE to pay more? And again, the newer income-drive repayment plans offer more attractive ways to lower your required monthly payment.

Income-Sensitive and Income-Contingent Repayment

These are both older income-driven repayment plans that have since been surpassed by the newer, better income-driven repayment plans.

The one exception that I know of is for Parent PLUS loans, which are not eligible for the other income-driven repayment plans. In that case, it may be worth consolidating your Parent PLUS loans (which we’ll talk about next week) and looking into the income-contingent repayment plan.

Student loan repayment plans to consider

Alright, now that we’ve gotten those out of the way, let’s talk about the student loan repayment plans you might actually want to use.

For each repayment plan, I’ll cover:

The basic characteristics

Pros

Cons

When it makes sense to choose it

And don’t forget, you can click here to get the quick-and-dirty cheat sheet with all the essential details!

Standard Repayment

The standard repayment plan is what you will be slotted into if you don’t make a choice to do something different. And while it doesn’t have any special benefits, it’s going to be the right choice for many people.

The standard repayment plan generally has a 10 year term and requires a fixed monthly payment of at least $50. So assuming you make every single minimum monthly payment, you’ll be debt-free in 10 years.

Now if you have a federal consolidation loan, the standard repayment period can actually extend up to 30 years. You can review this chart to see how the term varies based on your loan balance.

Pros of the standard repayment plan:

Easy to enroll in (since you’re enrolled by default).

Potential to minimize the interest you pay over time, since it’s the shortest repayment period.

Cons of the standard repayment plan:

If you have a lot of debt compared to your income, the monthly payment can be a strain on budget.

There is no possibility for forgiveness (unlike the income-driven plans below).

Your monthly payment is fixed, even if you go through a rough patch like losing a job or otherwise facing a decrease in income.

The standard repayment plan makes sense if your student loan debt is relatively low compared to your annual income. As a general rule of thumb, if you owe less than one year’s salary you may not benefit much from the income-driven repayment plans below.

It may also make sense if you plan on paying your student loans off quickly anyways, since it’s easy to enroll and you can get right to maximizing your monthly payments.

But if you have a significant amount of student loan debt, you might really benefit from using one of the income-driven repayment plans we’ll talk about next.

Pay As You Earn (PAYE)

Pay As You Earn is one of the newest repayment plans available, and honestly at this point it’s the gold standard.

If you qualify for Pay As You Earn, you should generally take it. And there are a few reasons for that.

First, your monthly payment is capped at 10% of your discretionary income. There’s a complex calculation there that factors in your income and family size, but all it really means is that if your income is low, even temporarily (like with a job loss), your required monthly payment will decrease. That flexibility can be really helpful.

Second, your required monthly payment will never rise above what you would have to pay under a standard 10 year repayment plan, no matter how much your income increases. So there’s no risk of having to pay more each month than you would under a different plan.

Third, if you still have a student loan balance after 20 years of payments, that balance will be forgiven. The amount that’s forgiven will generally be taxable as income, unless you qualify for the Public Service Loan Forgiveness program we’ll talk about below. But as long as you plan ahead for the tax payment, it’s often still worth it.

Finally, remember that you’re always allowed to pay more than the minimum. So if you want to pay your student loans off quicker and save yourself some interest, you can certainly do so.

Basically, Pay As You Earn offers a TON of flexibility while still allowing you to pay off your loans as quickly as you’d like. It’s hard to beat.

You can use this repayment estimator as an initial screen to see if you might qualify, and you can click here to apply online.

Pros of Pay As You Earn:

Monthly payments that are limited by the income you’re currently earning.

You will never have to pay more than the standard 10 year repayment amount.

You may qualify for loan forgiveness.

You still have the option of paying your loans off quicker.

Cons of Pay As You Earn:

A longer repayment period means you may end up paying more in interest.

More paperwork than standard repayment.

It’s limited to federal direct student loans (thought you may be able to consolidate certain non-eligible types of loans to make them eligible).

It’s also limited to people who were new borrowers as of 10/1/2007 and took out a student loan on or after 10/1/2011.

Again, while there is no answer that’s right for everyone, if your student loan debt is close to or more than your annual income it makes sense to at least apply and see if you qualify for Pay As You Earn.

The flexibility it offers is second to none.

Income-Based Repayment (IBR)

The other major income-driven repayment plan is called Income-Based Repayment and it has many of the same characteristics as Pay As You Earn.

Just like Pay As You Earn, your monthly payment fluctuates with your income. The difference is that with IBR it’s capped at 15% of your discretionary income instead of 10%, so your monthly payment may be higher.

And just like Pay As You Earn, your monthly payment will never exceed what you would have to pay under a standard 10 year repayment plan. And you still ALWAYS have the option to pay more if you want.

Finally, you can have any remaining balance forgiven after making 25 years of payments (as opposed to 20 with PAYE).

So why would you choose Income-Based Repayment over Pay As You Earn when they’re essentially the same but IBR comes with a higher monthly payment and a longer repayment term?

The first answer is that as long as you qualify for Pay As You Earn, you probably wouldn’t choose Income-Based Repayment. Pay As You Earn is generally a better deal.

But the second answer is that it’s easier to qualify for Income-Based Repayment because there aren’t as many restrictions around when you borrowed the money. So if you can’t qualify for Pay As You Earn, then Income-Based Repayment could make a lot of sense.

Pros of Income-Based Repayment:

Easier to qualify for than Pay As You Earn.

Monthly payments that are limited by the income you’re currently earning.

You will never have to pay more than the standard 10 year repayment amount.

You may qualify for loan forgiveness.

You still have the option of paying your loans of quicker.

Cons of Income-Based Repayment:

Not quite as favorable as Pay As You Earn.

A longer repayment period means you may end up paying more in interest.

More paperwork than standard repayment.

Quick note: There are actually now two versions of IBR, an old one and a new one. The new one caps your monthly payment at 10% of discretionary income, just like PAYE, but you must be a new borrower as of July 1, 2014. So anyone who qualifies for the new IBR also qualifies for PAYE, and PAYE is still better because of how it calculates interest.

Moral of the story: I can’t think of a good reason to choose the new IBR. The way I see it you should choose PAYE if you can, and if you can’t then you would look at the old IBR.

Public Service Loan Forgiveness (PSLF)

Let’s get this out of the way right up front: Public Service Loan Forgiveness is AWESOME!

Essentially, this program allows government and non-profit employees to make 10 years’ worth of payments and then have the entire remaining balance forgiven.

Oh, and unlike most student loan forgiveness, in this case it’s COMPLETELY tax-free.

Pretty cool!

If you’re working for the government or a qualifying non-profit and plan on being there for at least 10 years, AND you have a significant amount of student loan debt, this program is really a no-brainer.

Now, the downside is simply that there are a lot of requirements to meet and paperwork to handle. Here’s what you need to do in order to qualify (and here’s some more detail):

Work for the right type of company. Generally this means a government or non-profit organization. Work full-time, which is either 30 hours per week or other criteria defined by your employer. Have federal direct student loans. If you have other types of federal loans, you may be able to consolidate them in order to qualify. Make 120 qualifying monthly payments (they don’t have to be consecutive). Be enrolled in a qualifying repayment plan, which includes standard repayment and any of the income-driven repayment plans (like PAYE and IBR discussed above).

And even if you do all of that, you will still need to submit an application to prove it. And that application isn’t even available yet since the first borrowers eligible for this program haven’t yet had 10 years to make qualifying payments. So it’s not yet known exactly what that process will look like.

With all of that said, if you do qualify and meet all the requirements, the savings can be huge. So it’s worth understanding all the details so you get it exactly right.

Pros of Public Service Loan Forgiveness:

Enrollment in an income-driven repayment plan means your monthly payments are limited by the income you’re currently earning.

Potential forgiveness of your remaining balance after just 10 years.

Any forgiveness is completely tax-free.

Cons of Public Service Loan Forgiveness:

Limited to people working in certain industries.

Significant requirements and paperwork needed to qualify.

Smaller monthly payments may mean more interest paid over time if it takes you more than 10 years to complete.

Summary of student loan repayment plans

Whew! That was a lot of information. If your head isn’t spinning just a little bit you’re a smarter person than I am. This stuff is complicated!

So to make it as simple as possible for you, here are the big, high-level takeaways:

It’s generally best to avoid the following repayment plans: extended, graduated, income-contingent, income-sensitive.

The standard repayment plan is best if your debt balance is relatively low compared to your income.

If your debt balance is high, Pay As You Earn offers the best terms and most flexibility of the income-driven repayment plans.

If you don’t qualify for Pay As You Earn, Income-Based Repayment offers similar benefits and is easier to qualify for.

Public Service Loan Forgiveness can be a great way to save a lot of money, if you qualify and your debt balance is high.

With all repayment plans, you can ALWAYS choose to pay more than the minimum and get rid of those loans sooner.

And don’t forget, I created a simple cheat sheet for you that contains all the most important information from this post and can be used as an easy reference tool as you make your decision.

Click here to get it.

Hope that helps! If you have any questions, please leave them in the comments and I’ll do my best to answer them.