EDCAP Home > Repayment Guide Overview > Debt Tackling Strategies & Payment Plan Options
Student loan repayment is not a one-size-fits-all approach. Each borrower has unique goals and circumstances that require personalized strategies. Unfortunately, many borrowers make the mistake of not having a clear strategy in place to tackle their student loan debt effectively. While some borrowers manage to find a repayment plan that suits their financial situation, others end up using forbearance and deferments as temporary solutions without making any progress towards debt elimination. It is essential to have a strategy in place to eliminate your debt as quickly as possible or to have peace of mind that you are on a manageable path.
Here are three high-level strategies that can guide you in tackling your student debt.
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- Best suited for borrowers with low loan balances or high incomes relative to their debt.
- If you have the financial capacity, consider making lump sum payments or paying more than the required minimum each month, regardless of the repayment plan.
- Aggressive payments lead to faster loan elimination and less interest paid.
- You can implement this strategy by enrolling in any repayment plan you are comfortable with but do the math and make sure you know how much you need to pay per month/year to finish paying off the loans within the timeframe you set for yourself.
- If you choose to make more than the required payment or a lump sum payment, contact your servicer and instruct them to apply the extra payments to principal. You want to avoid “Pay Ahead Status” where extra payments are applied to the next month’s bill. That will not reduce your interest cost over the life of the loan.
- Best for borrowers facing high loan balances or with low-to-moderate incomes compared to their debt.
- Instead of prioritizing aggressive repayment, borrowers opt to make only the minimum required payment until they become eligible for loan forgiveness.
- You must make sure you meet the forgiveness program’s requirements you are pursuing and track your progress.
- It's crucial to note that making extra payments may not be the most financially sensible option unless borrowers have a realistic chance of paying off the entire balance in less time than it takes to qualify for forgiveness.
- Typically, this strategy is implemented through an Income-Driven Repayment (IDR) plan as usually required by the respective federal forgiveness program.
- If paying off your debt or pursuing forgiveness is not a feasible option, you may have to consider a strategy of paying the minimum required until you die.
- This strategy is often chosen by older borrowers who cannot realistically repay their loans or achieve forgiveness.
- While it may not result in the most optimal outcome, it allows borrowers to manage their payments in a more sustainable manner.
- By enrolling in the lowest repayment plan option available, whether it be a traditional plan or an Income Driven Repayment plan for borrowers with lower incomes, you can ensure that your monthly payments remain manageable.
- Note: Federal student loans are dischargeable upon death. This debt does not pass on to your estate or beneficiaries.
Repayment Plan Options
There are two buckets of federal student loan repayment plans: Income Driven Repayment and traditional plans. Here are some highlights of these two buckets:
Income-Driven Repayment Plans | Traditional Repayment Plans | |
Pros | Affordable payments based on income. Loan forgiveness after 10-25 years of payments, or just 10 years with PSLF. Required for other forgiveness programs. Flexibility to adjust payments whenever income changes. | More predictable payments. Shorter repayment period in some. cases, potentially paying off loans faster. No annual recertification or income verification. |
Cons | Annual renewal and income verification required. Potential interest accumulation over extended repayment period. Longer repayment period, extending time to become debt-free. | Higher monthly payments, potentially challenging for those with limited income. Limited flexibility in adjusting payments. No forgiveness. |
Plan Names | Saving on a Valuable Education (SAVE, replacing the REPAYE plan) Pay As You Earn (PAYE) Income-Based Repayment (IBR) Income-Contingent Repayment (ICR) | Standard Graduated Extended |
Income Driven Repayment Plans
Monthly payments are based on income, family size and tax-filing status. Forgives remaining balances after making 20-25 years of payments with no employment requirement. You must recertify these plans every year because they are based on your income. You can enroll in an Income Driven Repayment plan online via studentaid.gov/idr.
Income Contingent (ICR) | Income Based (IBR) | Income Based (IBR) (New Borrowers) | Pay As You Earn (PAYE) | Saving on a Valuable Education (SAVE) | |
Eligibility | All Direct Loan borrowers | Income-eligibile brorowers (loans issued before 7/1/2014) | Income-eligible borrowers (loans issued on/after 7/1/2014) | Income-eligibile borrowers (loans issued on/after 10/1/2011) | All Direct Loan borrowers |
Monthly Payments | 20% of borrower's discretionary income | 15% of borrower's discretionary income | 10% of borrower's discretionary income | 10% of borrower's discretionary income | 5-10% of borrower's discretionary income* |
Repayment Term | 25 yrs | 25 yrs | 20 yrs | 20 yrs | 10-20 yrs (undergrad loans) 10-25 yrs (graduate loans |
Pros | Outstanding balance forgiven after 25 yrs | Outstanding balance forgiven after 25 yrs | Outstanding balance forgiven after 20 yrs | Outstanding balance forgiven after 20 yrs & lower monthly payments | Outstanding balance forgiven after 10-25 yrs; interest subsidy; & lowest monthly payments* |
Cons | Forgiveness loan balance may be subject to income tax after 2025 & little may be left to be forgiven | Forgiveness loan balance may be subject to cincome tax after 2025 | Forgiveness loan balance may be subject to income tax after 2025 | Forgiveness loan balance may be subject to income tax after 2025 | Forgiveness loan balance may be subject to income tax after 2025 |
*In July 2024, the following SAVE plan benefits go into effect: Payments on undergraduate loans will be reduced to 5% of discretionary income, while graduate loans will remain at 10%. If you have both, it will be a weighted average between 5-10%. Remaining loan balances forgiven for borrowers who took out $12,000 or less and have made payments for at least 10 years. Calculate your payments under SAVE.
Remember, IDR plans require annual recertification as they are based on income.
Be strategic about IDR Recertification. Borrowers who are eligible for the Covid Forbearance will not be required to recertify IDR plans earlier than six months after the payment pause ends. But if your income is lower now than it was in March 2020 or the last time you submitted an IDR application during the payment pause, you may benefit by recalculating or switching your plan before payments resume.
Traditional Plans
Monthly payments are based on the loan balance, interest rates and a set payback period. These plans are not eligible for forgiveness and are best suited for people who can pay off their debt within a reasonable time, those not pursuing a federal forgiveness program, or those who simply cannot afford an Income Driven Repayment plan. To enroll in a traditional plan, you must contact your student loan servicer.
Standard Plan | Graduated Plan | Extended Plan | |
Eligibility | All Direct Loan borrowers | Income-eligibile brorowers | Borrowers with $30,000 or more in student loans |
Monthly Payments | Remains Fixed | Increased over time | Fixed or increases over time |
Repayment Term | 10 yrs (up to 30 yrs for Consolidation Loans) | 10 yrs (up to 30 yrs for Consolidation Loans) | Up to 25 yrs |
Pros | Pay less in interest over time | Lower monthly payment initially | Lower monthly payments |
Cons | High monthly payments | Payments increase throughout the repayment period | Pay more in interest |
If you have consolidated Direct Loans, you will be able to extend the time you have to repay your loans under traditional plans up to 30 years. If you foresee having to repay your loans for 20-25 years, consider an Income Driven Repayment plan instead.
Other helpful resources within this guide: