Navigating Federal Loan Repayment Plans: What Are My Options?
- Jeff Bettag
- Apr 26, 2024
- 4 min read
As you enter into learning about repayment, you may find yourself wondering, what even are these plan outputs? What do they stand for? What are some of the basic details that drive them?
It is easy to feel overwhelmed by the myriad of federal student loan repayment plans available? You're not alone. With options like SAVE, PAYE, and the standard repayment plan, it's easy to feel confused about which one is right for you. In this guide, we'll break down each plan by highlighting the basic features, benefits, and considerations, so you can start to make an informed decision about your student loan repayment journey.
Understanding the Basics
Before diving into the specifics of each repayment plan, let's first establish a baseline understanding of federal student loans. These loans are typically offered with a fixed interest rate and various repayment options to accommodate borrowers' financial circumstances. Generally there are either fixed plans or income driven plans. Fixed plans include standard repayment, graduated plans, and extended plans. Income driven plans include SAVE, PAYE, income based repayment (IBR), and income-contingent repayment (ICR). Given the majority of borrows will repay under only a few of those plans, the three primary federal repayment strategies we'll explore are the Standard, SAVE (Standardized, Affordable, and Valuable Education Loan Repayment Plan), and PAYE (Pay As You Earn), as are on our calculator.
1. Standard Repayment Plan
The standard repayment plan is the default option for federal student loans. Under this plan, borrowers make fixed monthly payments over a period of 10 years. While this plan offers the shortest repayment term and lowest overall cost, it also tends to have higher monthly payments compared to other options. Borrowers who can afford higher monthly payments may benefit from this plan as it allows them to pay off their loans more quickly and with less interest over time. which may not be feasible for those whose sole income is a resident salary.
Although the standard plan generally results in the least amount paid on the loan, it is not affordable early on for those with limited income. The SAVE and PAYE plan tend to be more popular for those in lower income brackets, which I’ll discuss next.
2. SAVE (Standardized, Affordable, and Valuable Education)
The SAVE repayment plan (formerly REPAYE) is designed to offer borrowers more flexibility in managing their student loan payments. Under this plan, monthly payments are based on a percentage of discretionary income, with adjustments made annually. This can be particularly beneficial for borrowers with fluctuating incomes or those who anticipate changes in their financial situation over time. Of note, tax filing status with dependents, spouse, and other variables can have significant impact. It is based on 10% of your discretionary income, which is the difference between your annual income and 225% of the poverty guideline for your family size and state of residence. This calculation divided by 12 is your monthly payment.
3. PAYE (Pay As You Earn)
PAYE is another income-driven repayment plan that offers relief to borrowers struggling with high student loan payments. Similar to SAVE, monthly payments under PAYE are based on income and family size, with adjustments made annually. However, PAYE typically caps monthly payments at 10% of discretionary income and offers forgiveness of remaining balances after 20 years of qualifying payments. Discretionary income is calculated to be higher than that of SAVE.
Making an Informed Decision
Choosing the right federal student loan repayment plan depends on your individual financial situation, including income, family size, and future career prospects. Additionally, electing for public service loan forgiveness will change terms and timelines depending on where and how you set up forgiveness.
While the Standard plan offers the shortest repayment term and lowest overall interest paid, income-driven plans like SAVE and PAYE provide valuable flexibility and forgiveness options for borrowers facing financial challenges. With no changes to the current structure, the majority of borrowers will be eligible for and likely use the SAVE plan.
However, before selecting a repayment plan, consider factors such as your current income, anticipated future earnings, and long-term financial goals. Additionally, don't hesitate to reach out to your loan servicer for personalized guidance and assistance in choosing the best option for your needs.
Navigating student loan repayment can be complex, but with a clear understanding of your options and careful consideration of your financial circumstances, you can take control of your debt and move toward a brighter financial future. As always, if you are in need of more financial help or confusion, we recommend finding a professional to help you on this journey. See our summary points below, and calculate/compare a repayment with our calculator here!
STANDARD | SAVE/PAYE |
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For more information on these plans, we recommend visiting:
The federal website has additional details, examples, and further steps you can take such as consolidation, switching plans, and other perks, tips, and tricks.
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Jeff and Nik