This is the second in a series on student loans. Be sure to check out our previous post on the basics of student loans!

After graduation, you typically have a 6 month grace period before loan payments are due. Interest does accrue during this period, so if you are a position to make payments earlier you might want to do so!

During your grace period you will have to choose the payment plan that you wish to follow. They offer varying terms, including varying repayment lengths. In general, lower monthly payments means longer repayment – and more overall interest. But since some repayment options and/or careers offer loan forgiveness after a certain length of time, picking the option with the lowest interest over time might not actually be your best bet.

Read on for more on the differing options and which might be best for your own situation. Your interest rate will remain constant no matter what repayment option you choose. Note that repayment options for consolidation loans may have slightly different terms.

Standard Loan Repayment

  • Overview: Basic student loans repayment with fixed monthly payments; shortest term and lowest interest overall.
  • Available for: everyone.
  • Length of repayment: 10 years for individual loans, up to 30 for consolidation loans depending on the total amount of the consolidation loan.
  • Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance after 120 payments for those employed full time in public service jobs.
  • Choose this if: You have no other debt, can afford the minimum payment and/or wish to complete repayment with as little interest in as little time as possible. If the minimum payment is a stretch, you might consider another option but strive to make extra payments, getting as close to the standard payment as possible.

Graduated Loan Repayment

  • Overview: low payments initially (equal to at least the monthly accruing interest), monthly amount increases every 2 years.
  • Available for: everyone.
  • Length of repayment: 10 years for individual loans, up to 30 for consolidation loans depending on the total amount of the consolidation loan.
  • Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school.
  • Choose this if: you can’t afford monthly payments on the standard plan; you are entering a low paying job but expect a rise in income over time; you are focusing on higher interest debt first but will have more to contribute in future years.

Extended Loan Repayment

  • Overview: Extends payments over 25 years, can be offered with fixed payments or graduated payments that adjust every two years, as above.
  • Available for: Those with more than $30,000 in Direct Loan debt.
  • Length of repayment: 25 years.
  • Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance for those employed full time in public service jobs, after 120 payments that are equal to or greater than the standard repayment amount.
  • Choose this if: You cannot manage payments over a shorter period of time. Be very careful when judging your ability to manage payments for another plan – this plan will result in more interest paid and thus a higher total repayment amount.

Income Based Repayment (IBR)

  • Overview: Extends and lowers payments to make them affordable based on your income and the size of your family. Most people will pay less than 10% of gross income in student loan payments.
  • Available for: Those who would owe less under IBR than under the standard plan, as calculated by the Department of Education.
  • Length of repayment: up to 25 years depending on your payment.
  • Loan Forgiveness: All remaining debt after 25 years; up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance for those employed full time in public service jobs, after 120 payments that are equal to or greater than the standard repayment amount.
  • Choose this if: your debt payments under other plans would be a hardship, your income is so low that your remaining (forgiven) debt over 25 years would be substantial.

Income Contingent Repayment (ICR)

  • Overview: Payment is based on your income and recalculated annually. Unpaid interest is capitalized annually (meaning that you pay interest on previously accrued interest).
  • Available for: Everyone, although in certain cases your payment might actually be higher than the Standard repayment plan (e.g., if you have a very high income relative to your student loan debt).
  • Length of repayment: up to 25 years depending on payments.
  • Loan Forgiveness: up to $17,500 for those who teach at least 5 years in a low-income elementary or secondary school; remaining balance for those employed full time in public service jobs, after 120 payments that are equal to or greater than the standard repayment amount. Any remaining debt after 25 years is discharged, not forgiven – and you will owe income taxes on the discharged amount.
  • Choose this if: you absolutely have to. Because of the interest capitalization and taxation on the discharge of remaining debt, IBR is likely a better choice for anyone who truly cannot afford a higher payment. If you don’t qualify for IBR, you probably don’t need to choose ICR.

Final Thoughts on Student Loan Repayments

The Federal Government has a great loan repayment calculator that breaks down your repayment options, showing the length of repayment, monthly amount and total amount for each option. You can run the numbers for both consolidated and non-consolidated loans by entering either “yes” or “no” when asked “Add to Consolidation?”

While you must choose a repayment plan before beginning repayment, you may choose to switch plans if your circumstances change. Unconsolidated loans can be consolidated in the future, but once you consolidate you cannot unconsolidate. Remember that in general it is better to pay less interest over time, which means that higher payments over a shorter repayment period are likely your best option. But if your student loan is one of many debts, you are trying to save for a house or other big purchase, or your financial situation is likely to change dramatically over time, you may choose to deliberately stretch out your payments, even if you can technically afford to pay more. You may also choose to accelerate payments – something we’ll talk more about in a future post!

Check out all of the posts in our Student Loan series!






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Comments to Student Loans: Repayment Options

  1. I would like to make one correction, if one has federal subsidized student loans the interest does NOT accrue during the 6 month grace period.

    Ginger

  2. Hi Jill,
    This might be of interest to your readers –
    it’s a way to save thousands on student loan
    repayments if you have a fairly large balance.

    http://thelegaldollar.blogspot.....-year.html

    Basically, after you graduate you “attend” (including on-line courses that you can complete on the weekend) community college part time to maintain your in-school deferment. Thus, no interest accrues on your subsidized loans. Meanwhile, you devote yourself to paying down the unsubs.

    Managing Partner


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