On average, college graduates will leave school with a minimum monthly payment of $351. You’ll have this monthly bill of sorts before you ever rent an apartment or start paying your electric bill.
If you think your student loans are causing stress, you’re not alone. Student loan debt can lead to poor mental health. To help you deal with that stress, know your options.
Before you graduate, make sure you have a plan. If you don’t think you can afford $351 per month after you graduate, there are several student loan repayment options to help you out.
On the other hand, if you can pay $351 per month, there are some strategies to repay them faster. Paying off your student loans early can get that monkey off your back.
We used an adjusted gross income of $35,000.
As you can see, if you can stick to the standard repayment plan, it’s the best option. With the standard repayment plan, you’d end up paying a total of about $60,000.
On the other hand, when you used the extended repayment options, you start to pay over $80,000. In some cases, you might pay almost $90,000 in total.
If you can’t afford to pay the standard monthly payments, we outline the seven other options below.
There are 7 alternative student loan repayment options
1. Graduated Repayment Plan
You can think of a graduated repayment plan as a staircase.
In theory, as you get older you should make more money. As you make more money, you can afford to make larger student loan payments.
The graduated repayment plan starts with a low payment and slowly increases year by year.
You’ll end up paying more over time than the standard repayment plan. This is mainly because you will be making smaller payments at first. Since you make smaller payments, interest will accrue on your larger student loan balance.
2. Extended Repayment Plan
The extended repayment plan gives you 25 years to pay back your loans instead of 10 years. Essentially, you stretch your payments out over a longer time period which leads to a smaller minimum monthly payment.
Similar to the graduated repayment plan, you’ll end up paying more than the standard repayment plan. Interest will accrue on your balance for 25 years instead of 10 years.
3. Revised Pay As You Earn Repayment Plan (REPAYE)
On the REPAYE plan, your monthly payment is 10% of your discretionary income. This is your income left over after paying for housing, transportation, and other items required to live.
Basically, the REPAYE plan calculates your monthly payment based on income minus expenses.
Your monthly payment is recalculated each year and it’s partially based on your family size.
Although REPAYE is an option to lower your monthly payment, you could have a payment higher than the standard 10 year plan.
If you use this plan, you are eligible to have your student loan balance forgiven after 20 or 25 years. However, keep in mind a forgiven student loan balance may require you to pay income tax on the amount forgiven.
Also, you will likely pay more over time than the standard 10 year plan.
4. Pay As You Earn Repayment Plan (PAYE)
PAYE is similar to REPAYE. However, your debt must be high relative to your income.
In addition, your monthly payment on a PAYE plan will never be higher than the standard 10 year plan’s monthly payment.
Just like REPAYE, you may have to pay income tax on any amount forgiven by the government.
In addition, you will likely pay more over time than the standard 10 year plan.
Finally, there are 3 student loan repayment options based on your income
Income based repayment, income contingent repayment, and income sensitive repayment round up the final three ways to pay back your federal student loans.
For the most part, these repayment options calculate a monthly payment as a percentage of your discretionary income. As mentioned above, this would typically be your monthly income minus your expenses to live (rent, transportation, food, and more).
In the case of Income Based Repayment, your payment can never be more than the standard 10 year plan. However, in the case of Income Contingent Repayment, it’s possible your payment could be more than the standard 10 year plan.
With both Income Based Repayment and Income Contingent Repayment, your loans could be forgiven after 25 years. However, as noted above, you may have to pay income tax on the forgiven amount.
To view more details on all repayment options, visit studentaid.ed.gov.
Refinancing isn’t always the best option.
At some point, you may think to refinance your student loans to get a lower interest rate or a lower monthly payment.
Be careful when considering to refinance your federal student loans.
- Refinancing usually means refinancing your federal student loans into private student loans.
- If you refinance your federal student loans, you may lose the option of student loan forgiveness.
- The 7 student loan repayment options listed above are typically not available through private student loans.
- Private student loans are typically more expensive than federal student loans.
- The interest rates on private student loans are variable.
If you can pay, use a debt snowball or a debt avalanche.
If you’re fortunate enough to afford your monthly payment, consider paying more than the minimum.
There are two common strategies to paying off your student loans: debt snowball and debt avalanche.
To save the most money, use debt avalanche. The debt avalanche tells you to sort your loans by highest interest rate. Then, you pay off the highest interest rate loan first.
On the other hand, the debt snowball method is more psychological. The debt snowball tells you to attack your smallest balance first. Armed with the success of paying off a loan in full, you can focus on the next lowest balance.
It’s up to you which repayment method to choose. Many people swear by the debt snowball method, but mathematical sticklers will religiously tell you to choose debt avalanche.
When it comes to student loan repayment options, know you’re not alone.
1.2 million students are using a graduated repayment plan. 1.6 million students are using the extended repayment plan.
That’s almost 3 million students who have taken advantage of one of these repayment options.
- The average monthly payment for graduating college students is $351.
- There are seven student loan repayment options provided by the federal government.
- Four repayment options are designed to lower your monthly payment.
- Three repayment options are based on your discretionary income so you can first house and feed yourself before making your loan payment.
- Almost 3 million students take advantage of the graduated or extended repayment plans. If you find yourself needing to use these, don’t be ashamed. You’re not alone.
What about you? What is your experience with repaying your student loans? Let us know in the comments below.