How to choose the best student loan repayment plan

By Katie Lobosco, CNN

Washington (CNN) — Millions of borrowers are required to make their monthly student loan payment for the first time in three-plus years in October, but there are several repayment plans available that could make the transition easier.

Borrowers will be on the same payment plan they were before the pandemic pause started in March 2020, but they may want to consider switching to a different plan if their financial situation has changed.

Plus, there’s also a new repayment plan, known as SAVE (Saving on a Valuable Education), that launched this summer and could potentially lower monthly payments for millions of borrowers.

Borrowers can use Federal Student Aid’s online “Loan Simulator” to compare their estimated payments under different repayment plans. They can switch plans at any time, for free, by contacting their student loan servicer or by submitting an application to Federal Student Aid.

Here are some things to consider when exploring your payment options:

A quick rundown of available plans

Standard 10-year plan: When entering repayment for the first time, borrowers are automatically enrolled in the Standard Repayment Plan. These payments are based on how much debt a borrower has and sets a fixed monthly amount to ensure it’s all paid off, with interest, in 10 years.

Income-driven plans: If a borrower is struggling to afford monthly payments, an income-driven plan – of which there are four types, including the new SAVE plan – may be a good option. These plans calculate monthly payments based on a borrower’s income and family size and are meant to keep payments affordable for low-income borrowers. Monthly bills could be as low as $0.

Other non-income-related plans: The extended and graduated repayment plans could also lower a borrower’s monthly payment without calculating the amount based on income. They could be a good option for people who will eventually earn high salaries. The extended plan will spread payments over as many as 25 years. The graduated plan usually has a 10-year term, but payments start small and grow over time.

What to do if you want lower monthly payments

Income-driven repayment plans could be good options for borrowers who feel as though their monthly payment is too high on the 10-year standard plan or on the extended and graduated plans. The four plans are called SAVE, Pay As You Earn, Income-Based Repayment and Income-Contingent Repayment.

Under these income-driven plans, a borrower is required to pay a certain portion of their discretionary income, or what income is left after paying for family necessities such as rent, food and clothes.

Generally, monthly payments under an income-driven plan go up when a borrower’s income goes up – or payments go down when a borrower has less discretionary income. Borrowers are required to recertify every year, which means payments will adjust if their income or family size has changed.

The newest income-driven plan, SAVE, offers the most generous terms when it comes to lowering a borrower’s monthly bill. Once fully phased in next year, it will require some borrowers with undergraduate loans to pay just 5% of their discretionary income, down from the 10% required by most income-driven plans. SAVE also includes an interest subsidy so that debts don’t grow while a borrower makes payments.

Borrowers enrolled in income-driven repayment plans may also see their remaining student loan debt forgiven after making enough qualifying payments. The time to forgiveness varies by borrower and plan but won’t be longer than 25 years’ worth of payments.

Eligibility for the income-driven repayment plans depends on what kind of federal student loans a borrower has, their income and when the loans were taken out. Most federal student loan borrowers are eligible for SAVE.

What to do if you want to pay the least amount over time

Borrowers enrolled in the Standard Repayment Plan will usually pay the least amount over time. That’s because they will be finished paying in 10 years, leaving less time for interest to accrue.

Borrowers may pay even less over time if they “prepay.” They are allowed to pay an extra amount, in addition to what’s required, at any time. Because of interest, this could also lower the total amount they end up paying under the Standard Repayment Plan.

Limited options for parents

Parents who borrow to help finance their child’s education may have federal Parent PLUS loans, which are not eligible for all of the repayment plans.

Like with other loans, borrowers with Parent PLUS loans are enrolled in the Standard Repayment Plan by default and are eligible to switch into the graduated and extended plans.

Parent PLUS loans are not eligible for income-driven plans – but there is a workaround. If borrowers first consolidate their Parent PLUS loans into a Direct Consolidation Loan, they are then allowed to enroll in one type of income-driven plan – the Income-Contingent Repayment Plan – according to the Institute of Student Loan Advisors, a nonprofit that offers free student loan assistance.

Parent PLUS borrowers will not be able to enroll in the newest income-driven plan, SAVE, even if they consolidate.

It’s worth noting that the Income-Contingent Repayment Plan will close next year to new borrowers, except to those with consolidation loans that repaid a Parent PLUS loan, according to Department of Education rules.

How getting married can affect your payments

Marriage could result in a significant increase for borrowers enrolled in an income-driven plan because a spouse’s income will be included in the payment calculation.

But some married borrowers who file taxes separately can shield their spouse’s income to get a lower monthly student loan payment. This is true under the SAVE, Income-Based Repayment and Income-Contingent Repayment plans.

Borrowers enrolled in the 10-year standard plan won’t see a change after getting married.

What to do if you want Public Service Loan Forgiveness

The Public Service Loan Forgiveness program could be a great option for borrowers with a lot of student loan debt who work for a nonprofit organization or the government.

Qualifying borrowers will see their remaining student debt canceled after making 120 monthly payments. But they must be enrolled in the SAVE, Pay as You Earn, Income-Based or Income-Contingent plans.

Borrowers with older, federally owned Federal Family Education Loans (FFEL) are not normally eligible for the Public Service Loan Forgiveness Program. But under a one-time waiver, those borrowers could get credit for past payments if they consolidate their FFEL loans by the end of 2023.

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