4 Important Questions to Ask Before Choosing a Student Loan Repayment Plan
February 5, 2016 : Melanie Lockert – Guest Contributor
As graduation time approaches, you may be starting to think about paying back student loans. But did you know there are different repayment plans? If you have federal student loans, you’ll automatically be signed up for the 10-year Standard Repayment Plan. However, there are other options available.
Choosing the right repayment plan comes down to a few crucial questions. Before deciding how you’re going to tackle your student loan debt, be sure to answer the following:
1. How Long Is the Repayment Term?
The repayment term on a student loan is the number of years you have to pay it back. If you have federal student loans, you have the widest access to various repayment terms:
- Standard Repayment Plan: 10 years
- Graduated Repayment Plan: 10 years
- Extended Repayment Plan: 25 years (for borrowers with $30,000 or more in debt)
- Income-Based Repayment: 25 years
- Pay As You Earn (PAYE): 20 years
- Income-Contingent Repayment Plan: 25 years
Your repayment term will dictate how long you have to pay back your debt. Luckily, with federal loans, you can change your repayment plan at any time. So if you’re automatically enrolled in the Standard Repayment Plan and are hit by hard times, you can switch to an Income-Driven Plan or another plan with a longer term.
For private loans, you don’t have as many options. The lender dictates repayment terms, and most private lenders do not offer the same flexibility as federal loans. Typically, their repayment terms are five to 20 years. This also goes for student loan refinancing.
2. How Much Interest Will I Pay Over Time?
Picking a repayment plan isn’t just about how many years you’ll have to pay off your loans. Your repayment plan and how long it takes you to pay off debt directly affects how much interest you will pay in total.
It’s simple – the faster you pay off your loans, the less interest you’ll pay over time. If you choose a long repayment term, such as 25 years, you could end up paying double your original balance due to interest.
Consider the following example:
You have $35,000 in student loan debt.
The interest rate is 6.8%.
You choose the Extended Repayment Plan with a 25-year repayment term.
The monthly payment is $242.93.
At that rate, you’ll end up paying $37,875.26 in interest alone — more than your original balance!
You can save a lot of money in interest by choosing the Standard Repayment Plan. Using the example above, your monthly payment would be higher at $402.78, but you’d pay only $13,333.80 in interest. That’s still a huge chunk of change, but it’s much less than paying more than your original balance in interest.
It’s smart to use a student loan calculator and find out how much you will pay in interest when choosing your repayment plan.
3. How Will My Monthly Payment Be Affected?
Now that you’ve considered the repayment term as well as interest, it’s time to look at how your repayment plan will affect your monthly payment.
If you choose the Standard Repayment Plan, your monthly payment will be higher than on the Extended Repayment Plan. In the example above, there is a $159.85 difference between the monthly payments for the 10-year plan and the 25-year plan.
If you can find an extra $159.85 in your budget to swing the 10-year plan, you could be saving yourself from paying double your original balance.
Look at your income and expenses to see how much you can afford to devote to student loan payments. If you can’t comfortably afford your student loan payments, you may want to consider opting for Income-Based Repayment. However, it’s best to choose a shorter repayment plan when possible. You’ll pay more money up front, but a lot less in total.
4. What Special Options Are Available to Me?
Whether you’re graduating and are figuring out your options or are considering a repayment plan change, it’s important to look at your options.
Federal loans tend to have more repayment options, such as Income-Based Repayment, Public Service Loan Forgiveness and more. If you are working in the nonprofit sector or have six-figure debt on a low salary, you may want to take advantage of these repayment options.
If you have private loans or are thinking of refinancing your current loans, you may not have many options, but it doesn’t hurt to ask your loan servicer about what is available.
As a borrower, you want to know all of your options so you can choose the right repayment plan for your financial situation. Before choosing a repayment plan or changing to a new one, be sure to ask yourself these four important questions. And remember that if you have federal loans, you can change your repayment plan by contacting your loan servicer.