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After you graduate from college and enjoy your six-month grace period, it’s time to start paying off your student loans.
The Standard Repayment Plan is the default repayment plan that every federal student loan borrower begins with after leaving school. While this is the default option, it is not the only student loan repayment option. Some other plans will potentially allow you to make lower monthly payments, extend the repayment period, or both.
What is the standard repayment plan?
The standard repayment plan has fixed monthly payments that you pay for 10 years (or up to 30 years if you have a direct consolidation loan). You will make the same monthly payment throughout the repayment period, set to ensure you repay your loan in ten years, with interest.
When you start making payments on your federal loans, you will automatically be enrolled in the standard repayment plan, unless you decide otherwise to switch to another plan, such as income-based repayment plans. You will make 120 payments, which is monthly payments for 10 years.
Although your payments can be as low as $ 50 per month, they are not guaranteed to be that low; your monthly cost will be determined by your loan amount. This means that your monthly payments may be higher than those of other repayment plans.
Which loans are eligible for the standard repayment plan?
Direct loans and federal loans for family education are eligible, including:
How the Standard Repayment Plan Works
Let’s look at an example to show how the standard repayment plan works: Suppose you have $ 26,946 in student loan debt. When you graduate, your 3.9% interest rate kicks in. For the standard repayment plan, your monthly payments will be around $ 272 and will be repaid over 10 years. The total amount you will pay is $ 32,585, including $ 5,639 in interest.
While other plans may have lower monthly payments, the standard repayment plan allows you to pay off your loans as soon as you can. If you are not sure which plan is best for you, you can use the Loan simulator to get an idea of how much you are going to pay.
Benefits of the standard repayment plan
The advantages of the standard repayment plan include:
- Faster reimbursement. You pay off your loan over 10 years, giving you the flexibility to spend your money on other projects sooner, like buying a home, saving for retirement, or expanding your family.
- Less overall interest payments. Since you pay off your loan in 10 years, you will pay less interest on your loans overall compared to other repayment plans. Alternative options spread your loan repayment over a longer period of time, which means you’ll pay more interest over the life of your loan.
Disadvantages of the Standard Repayment Plan
The disadvantages of the standard repayment plan include:
- Larger monthly payments. Since you are on track to pay off your loans sooner, you will have higher monthly payments. It can seem intimidating at first, especially early in your career when you aren’t earning as much as someone who is more advanced or earning more money. If you can’t afford the monthly payments, you may want to consider other repayment plans.
Standard repayment plan alternatives
Even though the standard repayment plan is an option, it is not your only repayment choice. You may be eligible for other loan repayment plans, including:
- Progressive reimbursement. Payments start out low and then increase over time, approximately every two years. This strategy assumes that you will earn more income over time and can afford higher payments, but also ensures that you will pay off your loan within 10 years (or between 10 and 30 years for consolidated loans).
- Extended refund. This is available for borrowers with $ 30,000 or more in direct loans. You can have fixed or progressive payments, and your loans will be repaid within 25 years.
- Income Based Refund (IBR). You will make payments of 10% or 15% of your discretionary income, depending on when you first received your loans, but you will never pay more than what you would pay under the plan. standard refund. Your payments are updated every year based on your income and family size, even if they haven’t changed. After 20 or 25 years, your student loan balance is canceled.
- Income Based Reimbursement (ICR). Your payments will be the lesser of: 20% of your discretionary income or how much you would pay with a 12-year fixed payment repayment plan. Your payments are adjusted each year to reflect changes in your family and income, and you are required to update your information even if there have been no changes. After 25 years, your remaining balance is forgiven.
- Income Based Reimbursement (ISR). This is only available to borrowers of the FFEL program loan. Your payments are based on your annual income, but you are guaranteed to pay off your loan within 15 years.
- Pay as you earn (PAYE). Your monthly payments will be 10% of your discretionary income and you will not pay more than on the standard repayment plan. Your loan balance is written off after 20 years of repayment.
- Review of compensation as you earn (REPAYED). Direct loan borrowers will pay up to 10% of discretionary income with payments recalculated each year based on your income and family size. After 20 or 25 years, your loan balances will be canceled.
Many repayment plans require annual updates to your information to keep up with any changes. If you’ve gotten a raise this year, or have a sideline that earns more money, your payouts may go up. If you’ve recently lost your job and aren’t making any money, your payments could drop to as low as $ 0.
Refinance Your Federal Student Loans
If you have a mix of federal and private student loans or don’t like your federal payment plan choices, you can refinance your student loans.
Refinancing involves combining all of your student loans into one loan, replacing all of your payments with a single, simplified monthly payment. But refinancing is only done through private lenders; the federal government has no refinancing options (only consolidation). You will lose your ability to suspend payments through deferral or forborne, changing your repayment plan to a plan that is suited to your income or eligible for Public Service Loan Discount (PSLF).
While you can lose your federal protections, refinancing might be a good idea. For example, if you have exceptional credit and a solid income to pay off your student loans sooner than you would with federal repayment options, refinancing may work for you. But if you don’t have good credit or a solid income, you might want to explore other options.